The Financial Crisis Of 2007/2008 Led To A Global Recession (Coursework Sample)
The Financial Crisis of 2007/2008 led to a global recession from which the world is only just recovering
Within the UK, Northern Rock Plc was a flagship bank and a major casualty of the crisis, in order to prevent bankruptcy the bank was nationalised in February 2008.
The coursework will therefore consider the following questions
1. Discuss the factors which led to the financial crisis of 2007/8 (20%)
2. Explain how these factors impacted upon Northern Rock and the reasons for the nationalisation (20%)
3. Research the post nationalisation outcome and evaluate whether the net impact has been positive or negative. (20%)
4. Present and analyse the steps which have been take to prevent the repetition of a similar financial crisis (20%)
5. In conclusion, present an opinion as to whether or not the factor which triggered the 2007/2008 crisis have been addressed and whether you consider the rescue of Northern Rock to be a good or bad thing (20%)
Word count: 3000 +/- 20%
Word count does not include references, illustrations, charts etc.
Corporate Financial Management
Corporate Financial Management
The 2007-2008 global financial crisis is considered as one of the worst crisis to ever affect the modern financial environment since the 1930s Great Depression. The crisis started in the U.S. with the subprime mortgage crisis in 2007 and it managed to spread across the global banking institutions such as the Lehman Brothers in the U.S. and Northern Rock in the UK. According to Thakor (2015, p.166), most financial institutions engaged in massive risk-taking behaviors which magnified the real value of the global financial market thus leading to the financial crisis. Governments across the world were forced to bail out their financial institutions using fiscal and monetary policies in order to avert the collapse of the global financial system. This essay critically analyzes the course of the 2007/08 global financial crisis based on the UK experience, with a specific focus on the Northern Rock PLC.
Factors that led to the Financial Crisis of 2007/8
The roots of the global financial crisis date back to the 1970s deregulation policies initiated in the United States, United Kingdom, and other European economies, promoting minimal control of the financial systems and these policies gathered pace in the financial markets during the 1980s. Studies have revealed that deregulation loosened numerous regulatory policies by the government, thus freeing financial institutions and enabling them to operate across broad financial instruments and wide territories (Shin, 2009, p. 102). For instance, before 1970s, banking institutions, stockbrokers, investment banks (called merchant banks in the UK), and insurance organizations operated independently by specializing in their own line of business (learnhigher.ac. n.d).
Banking institutions were also subjected to strict financial and capital controls, particularly when it comes to the percentage of funds from depositors which could be given as loan to clients. Relaxation of the controls enabled financial institutions to access funds from both depositors and other financial markets(Ekmekcioglu, 2012, p.154). Credit liberalization influenced the huge expansion of debt, which includes mortgage debt, which was at times more than seven times the income of the borrowers.Returns were high on these forms of transactions and bankers underestimated the huge risks involved in raising these funds, a process that was known as securitization.
The sharp rise in the price of oil, increasing unemployment rates, and the resulting trade recession contributed to mortgage defaults, particularly in America where financial institutions had secured numerous mortgages. This contributed to the confidence crisis that made banking institutions to be wary of lending short-term finances to other banks (Scanlon & Whitehead, 2011, p.13). The liquidity problems spread across other countries such as the UK and European markets
In the past, the sound conditions in the financial markets encouraged financial institutions to engage in financial transitions that were highly risky and which motivated high leverage in the financial markets. For instance, financial innovation led to the development of complex financial instruments that were based on securitization of loans and they included collateralized debt obligations (CDOs) as well as a wide range of asset backed securities (ABS) (Dimsdale, 2009, p.1). Presence of credit derivatives that grew rapidly, especially the credit default swaps (CDS) tended to provide protection against risks to individuals who purchased highly risky assets. The traditional banking model where financial institutions held assets until maturity before financing its lending f...
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