Impact of the Global Financial Crisis

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Introduction

The global financial crisis of 2007-2012 has been well-thought-out as the worst financial crisis by several economists (Savoma, Kirton & Oldani 2011). The crisis resulted in the collapse of monetary institutions, downturns in delivery markets, unemployment, evictions from homes, and a dented financial market. The decline in consumer power and the collapse of leading business enterprises were largely attributed to the 2008 financial crisis. Poor estimation of bundled mortgages, unfavorable market practices, as well as the failure of financial institutions to hold up monetary commitments made by the housing sector triggered the global financial crisis (Savoma, Kirton & Oldani 2011).

Subprime mortgage crisis

The global financial crisis was triggered by a succession of actions and settings in the American housing industry (Muolo & Padilla 2010). The subprime mortgage crisis was a result of the failure of market restraints to monitor the risk level of mortgages issued by lenders. The subprime crisis was at its peak from 2005-2006. The subprime mortgage crisis was manifested by high nonpayment rates on mortgages with flexible rates (Muolo & Padilla 2010). This was due to loan incentives by banks which made optimistic customers obtain tricky mortgages with the certainty of refinancing them at more complimentary rates. Competition for income and restricted figures of creditworthy borrowers among mortgage lenders culminated in stress-free principles and high-threat mortgages to unpredictable borrowers (Muolo & Padilla 2010). However, this worsened through the market strength of subprime mortgage initiators, which led to a growing number of such kinds of products provided to clients. Refinancing of mortgages became difficult in 2006-2007 when housing prices dropped and interest rates rose (Muolo & Padilla 2010).

Impact on banks and their response

The global financial crisis had an undesirable impact on the financial sector. Extensive diffusion of credit danger in the subprime mortgage crisis impacted in principle on banks (Zeb 2010, p.11). This was characterized by a decline in accessibility to credit, spoilt self-assurance by investors, decline in global trade and a hold back in key world economies. Banks were also unwilling to loan within themselves (Zeb 2010, p. 17).

Since the downturn of split prices and stock market indices in July 2007, many banks have experienced noteworthy losses and decline in their market value. The failure of seven small banks in the United States, which were taken over by regulators, is a clear manifestation of impacts of the crisis (Zeb 2010, p. 24).

The financial sector responded quickly to the effects of the global financial crisis. Market oriented and authoritarian solutions were considered by banks in rejoinder to the crisis. Banks have improved on their financial policies, whose high ineffectiveness was a leading factor to the crisis (Zeb 2010, p. 30). Banks assumed enormous liability while providing mortgages, yet they had no sufficient financial moderation to absorb the high loan default rates. Questions about the steadiness of financial institutions led central banks into providing monetary support to banks.

Banks established improved corporate governance. A report by the Financial Crisis Inquiry Commission in United States on January 2011 concluded that the crisis was avoidable (Zeb 2010, p. 33). Further, the report attributed the crisis to poor financial regulation by banks and uncoordinated corporate governance characterized by too much risk taking (Zeb 2010, p. 37).

Banks expanded their monetary policies. Market pressures in the housing industry contributed enormously into many banks and financial institutions lowering their standards in attempts to match the operations of private banks (Zeb 2010, p. 38). With strong and sound policies, banks can easily control their lending and participation in new markets as well as neglecting the market pressures.

In the United States of America, banks adopted the American Recovery and Reinvestment Act of 2009 passed by the Congress (Zeb 2010, p. 42). The government responded with monetary motivation for banks and bailing institutions out of debts. Banks in the United States contributed to the crisis by failing as key market regulators, taking high risks and unidentified variance of safety (Zeb 2010, p. 46).

Morgan Stanley’s reaction on subprime crisis

Morgan Stanley is a multinational corporation from the United States of America that offers financial services. It provides products and services to customers who include governments, individuals, corporations and monetary institutions (Chernow 2010, p.12). Under the institutional securities segment, the company provides services such as investment raising and financial instruction. It also deals with real estate, commercial lending and mergers review (Chernow 2010, p.15).

Morgan Stanley endured hard time during the subprime mortgage crisis. On December 19, 2007, the company announced that it was getting an investment blend of US$5 billion from the China Investment Corporation in exchange for securities (Chernow 2010, p. 29). These securities constituted 9.9% of its share in 2010. The bank was amongst numerous institutions wedged in the crisis with reported losses of close to $300 million in a single day. A stock by Morgan Stanley Beazer Homes USA was a key element of the ever-growing real estate boil in America (Chernow 2010, p. 33).

The United States Treasury contracted Morgan Stanley in August 2008 to guide the government on viable recovery strategies for Fannie and Freddie Mac. However, on September 17 in the year 2008, it was reported that Morgan Stanley was having trouble after a 42% decline in its split value (Chernow 2010, p. 38). At the time, the company was weighing possible mergers with other monetary institutions that were willing to invest. An investment of $9 billion by Mitsubishi UFJ Financial Group in Morgan Stanley on September 29, 2008 led to a fall in stock valuation (Chernow 2010, p. 47).

In years preceding, the conduct of mortgage providers had distorted noticeably (Chernow 2010, p. 53). Lending values had deteriorated through submission of loans to high danger borrowers. A study conducted by the Federal Reserve between 2001 and 2007 established a downturn in interest rates between prime and subprime mortgages (Chernow 2010, p. 56).

Conclusion

The global financial crisis affected the banking sector significantly. Many banks experienced significant losses, high mortgage default rates and limited access to credit. With banks offering limited credit services, investor confidence was shattered to levels beyond repair for some banks. The crisis was characterized by incorrect risk pricing. Conflict of interests prevented the markets from pricing the risks correctly before the crisis. This also led to a steady growth of the mortgage industry beyond expectations thus making the crisis more unsettling. With so many mortgage providers and a limited number of creditworthy customers, the risk of lowering the standards cropped up. High risk taking played a noteworthy contribution in the development of the crisis by allowing unpredictable customers to access mortgages.

References

Chernow, R 2010, The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance, Groove Press, California.

Muolo, P & Padilla, M 2010, Chain of Blame: How Wall Street Caused the Mortgage and Credit Crisis, John Wiley & Sons, New York.

Savoma, P, Kirton, J & Oldani, C 2011, Global Financial Crisis: Global Impacts and Solutions, Ashgate Publishing Ltd, New York.

Zeb, J 2010, Impact of Current Financial Crisis on Banking Sector, GRIN Verlag, New York.

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BusinessEssay. 2022. "Impact of the Global Financial Crisis." January 16, 2022. https://business-essay.com/impact-of-the-global-financial-crisis/.

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BusinessEssay. "Impact of the Global Financial Crisis." January 16, 2022. https://business-essay.com/impact-of-the-global-financial-crisis/.