Factors Which Influenced the 2007-2008 Financial Crisis (Essay Sample)
The Financial Crisis of 2007/2008 led to a global recession from which the world is only just recoveringWithin 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
Name of Class
Name of Institution
City and State
CORPORATE FINANCIAL MANAGEMENT
Corporate financial management entails the use of financial principles and concepts within a corporation or company in order to generate and sustain financial worth through appropriate resource management and effective decision-making (Arnold, 2008, pp 3). Hereby, plans and strategies are developed and investment decisions are made for the financial benefit of the corporation. This involves goal-setting and strategic planning how to accomplish the goals and how to pay for them. Financial management is a crucial aspect which sustains companies and even nations. This is so as it is only through sustainable financial positions and viability that companies and even nations are able to operate and run.
Financial management helps avoid a financial crisis, which can be at different levels. The financial crisis of 2007/8 was a crisis with extensively devastating impacts; it was considered the worst financial crisis of the twenty-first century. It was thus termed as the global financial crisis. Northern Rock PLC was the bellwether bank, which suffered during this financial crisis of 2007-2008. Accordingly, the paper will look at the Northern Rock Plc as a case study. It will explain the factors which influenced the aforementioned financial crisis. It will further delineate how these factors impacted on Northern Rock Plc and the reasons as to why the company was nationalized. In addition, it will evaluate the net outcomes of the nationalization. The paper will also assess the measures to prevent repeated financial crises in the future. Finally, the paper will present a viewpoint on whether the trigger for the financial crisis has been resolved and whether Northern Rock's rescue was a positive or negative thing.
Factors Which Influenced the 2007-2008 Financial Crisis
The financial crisis of 2007/8 was the worst financial disaster since the Great Depression of 1929(Amadeo, 2018, pp 15). This 2007/8 financial crisis led to the Great Recession. The initial indications of this began in 2006 when the housing prices began to drastically fall (Amadeo, 2018 pp 21). This led to the subprime mortgage crisis caused by banks selling excess mortgages to meet the demand for mortgage-backed securities. The price of houses began drastically dropping in 2006. By 2007, the home ownership rate was at an alarming record of 68.6 percent (Chari, Christiano & Kehoe, 2008). The housing price declines led to defaults. This risk trickled into the mutual funds and pension fund. This posed a great risk for the corporations which owned the derivatives. This triggered the 2007 banking crisis, hence the 2007-2008 financial crisis (Amadeo, 2018, pp 6).However, many assumed at the beginning that the declines would never be national and/or simultaneous.
Figure SEQ Figure \* ARABIC 1: The Housing Pricing
Banks simply play the mediator role between the sellers who are the depositors and the loan takers who are the buyers. The banks give the sellers an interest rate by charging an even higher one on the buyers. This gives them their profit. When banks fail to have short-term funding their liquidity is highly threatened hence the banks are unable to repay their depositors. Lo (2012, p 160) indicates that there are different factors that influenced the 2007/8 financial crisis and no consensus has been reached on the exact causes. Thakor (2015, p 178) insists that the crisis was the climax of the 2006 credit crunch that proceeded in 2007.
Banks use the technique of securitization whereby they sell many of their loans to large financial companies termed as securitizers. The pooled s...
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