Discuss The Factors Which Led To The Financial Crisis Of 2007/8
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.
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Discuss the factors which led to the financial crisis of 2007/8
A decade prior to the 2007/8 global financial crisis, the US and several other advanced companies experienced an uninterrupted trend in the growth of real estate prices. These prices were significantly pronounced in residential property market boom in several nations, including the UK. Accounts from various reviews show consensus that the factors leading to the crisis are centred on asset securitization, government policies that were focused on increasing homeownership, global imbalances, ineffective monetary policies, and weak regulatory oversight in the financial sector. From another perspective, unethical business activities by financial institutions exacerbated the boom in real estate by exploiting loopholes that existed in capital regulation. In this context, the banks were able to substantially increase leverage while maintaining the capital requirements set by the governments.
According to Thakor (2015, p. 160), the banks engaged in weaker capital standards that included lack of sufficient traditional deposit funding. The banks also investment in risky and illiquid assets such as mortgages without the availability of adequate capital. Insights from Acharya and Richardson (2012, p. 12) highlight that the shadow banking system exercised prior to the financial crisis was highly dependent on short-term funding and was encouraged by the laxity of the oversight authorities. Consequently, this led to the asset price bubble, which triggered the financial crisis. Higher asset prices caused leverage sequence where an increase in household value subsequently led to increased debt. Adrian and Shin (2008, p. 2) allude that the increased asset prices contributed to ignorance of the risks financial institutions would face, which offered an opportunity in their balance sheets that facilitated increased leverage and supply of credit.
The increase in home value had an impact on the household sector, which led to an increase in the perceived household wealth. The availability of the equity amassed in homes made house products to upsurge their leverage considerably. Estimates show that the average owner was able to acquire 25 to 30 cents for each dollar with the rise of home equity, which was used for other expenses. Other factors that fuelled the asset price boom included the 2002 explosion of subprime mortgage credit in the US, which reached its peak in mid-2006. Following these activities facilitated by ineffective undertakings by financial institutions and governments triggered the financial crisis. The initial characteristics of failure were identified in early 2007 following losses incurred in the US subprime mortgages. Although these signs were related to the subprime mortgage, later in 2007 the localized consequences emerged as an international incident with damages scattering to Europe, which is exemplified by the challenges faced by Northern Rock mortgage lender in the UK.
Thakor (2015, p. 161) shows that the credit markets continued to tighten calling for interventions through Federal Reserve in the US through short-term lending facilities including other intervention...
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