Analysis of your Active Monetary Disaster additionally, the Banking Industry

Analysis of your Active Monetary Disaster additionally, the Banking Industry

The current fiscal crisis commenced as part from the world-wide liquidity crunch that transpired somewhere between 2007 and 2008. Its thought that the crisis experienced been precipitated by the thorough panic created by way of economical asset promoting coupled accompanied by a enormous deleveraging from the personal establishments in the significant economies (Merrouche & Nier’, 2010). The collapse and exit on the Lehman brothers a multi-national bank in September 2008 coupled with significant losses reported by significant banking institutions in Europe as well as United States has been associated with the global financial disaster. This paper will seeks to analyze how the global monetary disaster came to be and its relation with the banking field.

Causes with the money Crisis

The occurrence of the world financial disaster is said to have experienced multiple causes with the foremost contributors being the economic establishments additionally, the central regulating authorities. The booming credit markets and increased appetite of risk coupled with lower interest rates that experienced been experienced in the years prior to the personal crisis increased the attractiveness of obtaining higher leverage amongst investors. The low interest rates attracted most investors and finance institutions from Europe into the American mortgage market where excessive and irrational risk taking took hold.

The risky mortgages were passed on to money engineers from the big economical institutions who in-turn pooled them together to back less risky securities in form of collateralized debt obligations (Warwick & Stoeckel, 2009). The assumption was which the property rates in America would rise in future. However, the nationwide slump during the American property market in late 2006 meant that most of these collateralized debt obligations were worthless in terms of sourcing short-term funding and as such most banks were in danger of going bankrupt. The net effect was that most of the banking institutions had to reduce their lending into the property markets. The decline in lending caused a decline of prices inside property market and as such most borrowers who had speculated on future rise in prices had to sell off their assets to repay the loans an aspect that resulted into a bubble burst. The banking institutions panicked when this occurred which necessitated further reduction in their lending thus causing a downward spiral that resulted to the worldwide economic recession. The complacency via the central banks in terms of regulating the level of risk taking inside of the economic markets contributed significantly to the disaster. Research by Merrouche and Nier (2010) suggest that the low policy rates experienced globally prior to the disaster stimulated the build-up of economical imbalances which led to an economic recession. In addition to this, the failure with the central banks to caution against the declining interest rates by lowering the maximum loan to value ratios for the mortgages banking institution’s offered contributed to the monetary crisis.


The far reaching effects the monetary disaster caused to the global economy especially from the banking market after the Lehman brothers bank filed for bankruptcy means that a comprehensive overhaul in the international financial markets in terms of its mortgage and securities orientation need to be instituted to avert any future economic disaster. In addition to this, the central bank regulators should enforce strict regulations and policies that control lending on the banking market place which would cushion against economic recessions caused by rising interest rates.