The 2007-2009 Global Financial Crisis

Cite this


The 2007-2009 global financial crisis was initially referred to as the credit crisis and it was first felt in July 2007 in the United States when secured mortgage investors lost trust and confidence in the financial institutions. This resulted in a liquidity crisis which then led the central banks of the US and England to inject substantial amounts of capital into the financial stock markets. This indicated a foreseen credit risk in the entire economy and by 2008; the crisis had become deep as the financial stock markets began to collapse. What followed was the downfall of most banks, insurance companies and all other financial institutions. It became clear that the world was experiencing a great challenge in economic advancement (Goodman 2008).

According to Mehta (2007), since the beginning of this financial crisis, the world has had to cope with the diminishing economic growth as the great world economies look for means of solving the problem. The financial crisis started in the banking sector of the USA and has spread to all other sectors of the economy over time. The crisis can be traced through the complex banking problems that have developed leaving the management with a difficult time controlling the banking sector’s finances. By the year 2007, the US banking sector experienced difficulties in managing the borrowers’ trust; the mortgage owners were unable to make their mortgage payments, the borrowers and lenders could not make a proper judgment in relation to finances and people mainly relied on speculation. Lending money has also become a risky issue as financial innovation can only be made with uncertainty. The crisis has also resulted in weak policies among the world’s central banks and it has greatly affected the management of the central banks.

The global financial crisis has therefore affected, to a great extent, the economy and all governments are working towards overcoming its impact. With the current researches being made, it is clear that the crisis may lead to a long term world economic recession if it is not addressed in time. The crisis has had a major effect on the management of financial institutions which have had to look for means of survival to prevent the countries’ economies from collapsing (Heffernan 2005).

The study aims at establishing the impact of the crisis on the central banks and other banking sectors of the world. It looks into the ways in which different parts of the world have been affected and the measures they are implementing to overcome this problem.

The major cause of the crisis

Economic researchers all over the world have argued that the current financial crisis may result in a global economic recession which may cause greater challenges for all countries in the future. The first step towards solving the problem would be to identify its root cause. Although the US mortgage lending institutions were seen to have been the initial cause of the crisis, the entire financial system was also at risk of affecting the financial situation in the country. As the housing sector failed, the other financial institutions, mainly the banks followed and the government was faced with the challenge of reviving them all (Goodman 2008).

In mid-2002, the US housing sector collapsed with a value amount of $8 trillion. This resulted in a great inflation rate in the sector and economists had to develop new strategies to help overcome the inflation. As means of adjusting prices for inflation were being implemented, the US economists predicted an economic crisis that would worsen the inflation further but there was hardly any corrective action that was taken. As numerous housing institutions collapsed, the economy went down and other financial institutions were affected. By the beginning of 2007, the US economy had experienced a financial crisis as a result of the collapse of most banks and this also affected the other countries of the world which relied on the US economy. It became clear that the world was experiencing a great challenge in its financial sector and since then the world’s economists have been looking for various solutions towards overcoming this crisis (Goodman 2008).

Implications of the financial crisis among different parts of the world

Different countries have been affected differently by the financial crisis. The more powerful countries of the world like the United States of America and Europe are able to handle the crisis faster than the less powerful countries, mainly the developing and the less-developed.

Implications on Africa and other less-developed countries’ financial systems

Goodman (2008) argues that African countries have a relatively stable economy. This is because they have not fully developed their financial institutions and the rate of economic growth is relatively slow. However, it has been argued that the stabilities of African countries’ economies may not last for long and the financial crisis may end up deteriorating the state of the economy. Economists have argued that the world’s poor countries are more prone to the global financial crisis and Africa being mostly for the poor countries, there is a need to look for corrective means of handling the crisis.

The World Bank has provided a report that the effects of the global financial crisis could manifest itself in Africa through:

  • diminishing of cash and capital inflows
  • deteriorating trade and
  • deteriorating aids programs

This is because (Confer 2000):

  1. There would be no or fewer sources of obtaining funds from the developed countries. The developed countries that have been affected by the crisis would not be in a position to lend funds to the African banks.
  2. Most central banks in the African countries have kept foreign reserves in form of US dollars and the European pounds and therefore they would obtain low income during the financial crisis due to the low-interest rates set by the US and European governments and central banks.
  3. There would be the possibility of a decline in revenue obtained from the African countries’ exports because of the prevailing economic conditions of the developed countries.
  4. With the decline in the support of the agreements on Millennium Development Goals and New Partnership for Africa’s Development (NEPAD) by the developed countries, the African countries would also lack sufficient commitment for them.
  5. The food, fuel, fertilizer and finance crisis would still be affecting the African countries and would even go up when the developed countries withdraw their support to handle their financial crisis.
  6. Poor response of the African government towards the global financial crisis mainly because of the lack of proper expertise for handling the crisis and ignorance.

Implications on the developed countries’ financial system

According to Mehta (2007), the global financial crisis has mainly affected the financial markets and the banking institutions of the developed economies. It has affected the resource flows, the lending prospects and the current money transfers. The confidence for both the financial and housing institutions has also been lost by both the borrowers and the lenders. These have been brought about by:

  1. The decline in the real gross domestic product: Output of goods and services in the developed countries have resulted in fewer cash transfers taking place and fewer people investing with the financial institutions.
  2. Reduced levels of employment: With the economic downfall as a result of the financial crisis, few employment opportunities have come up and some people end up not contributing money to the gross domestic product of the country.
  3. Increased rates of foreclosures of mortgage companies: As people invest less in the housing institutions, there has been a need to close down some of these institutions to prevent their collapse. The mortgagers have had to lower their interest rates to overcome the prevailing crisis.
  4. Reduced interests rates in the banking sector: This has been used as one means of dealing with the crisis and it has prevented people from saving their money with the banks. Borrowing funds have also been made more difficult as a result.

It can therefore be argued that the developed countries have been directly affected by the crisis with the banks having to bear the major implications. The management in the banking sector would therefore be required to come up with the appropriate means of overcoming the crisis and preventing the possible downfall in the economy.

Implications towards the management of banks

MacDonald (2006) argues that the prevailing global financial crisis has been likely to result in a great shakeout in the banking sector. The savings have declined as a result of the decrease in the rates of interest. The management is faced with the challenge of encouraging more people to save their money with the banks in order to provide liquidity inflow. The management would be required to work with the central banks to help them modify the interest rates so that more people would be confident to invest their money with banks.

Another challenge that banks face is the lending of money. The crisis has greatly affected the ability of banks to give loans to their clients. With the slow rate of growth in the banking sector, there have been fewer cash inflows and this means that there has not been enough capital to lend out in form of loans. The low-interest rates have also limited banks from getting sufficient returns from the loans lent out. There has therefore been a challenge for the management to promote growth in the sector due to the low returns (MacDonald 2006).

According to Mehta (2007), the financial crisis has led to most financial institutions collapsing. The management of central banks has been faced with the challenge of trying to rescue the failing financial institutions in the major countries of the world. Many financial institutions in the US and in Europe have been facing the liquidity problem as they tried to improve the capital lending and borrowing ratio. The management has had to implement new strategies of improving their banking policies to cater for the new needs that have been arising. The central banks are also faced with the challenge of establishing the capital adequacy ratios that will be used to develop the collapsing financial institutions.

Mehta (2007) argues that, with the emergence of the global financial crisis in late 2002, the financial stock markets began to fall. Financial regulators developed means of handling the crisis to save the stock markets but most plans developed failed because the government felt that the policies established were likely to have negative implications on the economy. The stock markets continued to deteriorate and by 2007, the financial institutions suffered as they risked losing their capital injections. The decline in the stock markets was leading to a collapse of the world’s financial system and the British, European and US governments resolved to inject capital into the financial system to revive the financial institutions. This way the banks’ management would invest in the stock markets to help them stabilize. Experts would have to be involved to make appropriate decisions towards the amount of capital that would be injected into the stock markets.

As the financial crisis hit different parts of the world, some countries in Eastern Europe have had a great economic downfall. The banking sector has been affected by this economic crisis because loans that were given to these countries have been paid with a lot of difficulties. The value of money in the Eastern European countries have declined to a great extent and hence dealing with currencies between banks of the different countries has proved very difficult (Fung 2007).

Due to the decline in the value of money in some countries as a result of the global financial crisis, investors tried to invest in treasury bonds and gold mainly for the US. They also sought to convert their currencies to the US dollar to protect their currency. This greatly affected international trade and in turn affected the central bank management dealing with the International Monetary as it was not able to cater sufficiently for the needs of the different countries.


In conclusion, it is clear that the global financial crisis brought adverse effects not only to the economic growth of countries but mainly to the financial institutions. The central banks all over the world have been faced with the challenge of preventing the collapse of financial institutions and hence supporting the world’s economy. The world’s central banks are mainly concerned with maintaining economic and financial stability as well as ensuring the proper functioning of the payment and settlement policies in the financial institutions and this can only be possible if the financial crisis is completely overcome.


Bessis, J, 2001. Risk Management in Banking: Wiley Inc, London.

Confer, T, 2000. The future of the financial industry: New York University Press, New York.

Gardener, M, Mills, R and Cooperman, E, 2000. Managing Financial Institutions: Dryden. Goodman, P, 2008. Credit Enters a Lock down: Economic memo, New York Times. Heffernan, S, 2005. Modern Banking: Wiley Inc.

Hempel, G & Simonson, 1999. Bank Management: Wiley Inc.

MacDonald, S & Koch, 2006 Management of Banking: Thomson South Western Press, New York.

Mehta, D & Fung P, 2007. International Bank Management: Blackwell University Press.

Rose, P, 1999. Commercial Bank Management: Mc Graw-Hill, London.

Sinkey, J, 1998. Commercial Bank Financial Management: Washington DC; Prentice Hall, Washington DC.

Valentine, T & Ford, 1999. Readings in Financial Institution Management.

Cite this paper

Select style


BusinessEssay. (2022, December 12). The 2007-2009 Global Financial Crisis. Retrieved from


BusinessEssay. (2022, December 12). The 2007-2009 Global Financial Crisis.

Work Cited

"The 2007-2009 Global Financial Crisis." BusinessEssay, 12 Dec. 2022,


BusinessEssay. (2022) 'The 2007-2009 Global Financial Crisis'. 12 December.


BusinessEssay. 2022. "The 2007-2009 Global Financial Crisis." December 12, 2022.

1. BusinessEssay. "The 2007-2009 Global Financial Crisis." December 12, 2022.


BusinessEssay. "The 2007-2009 Global Financial Crisis." December 12, 2022.