Add comment In the aftermath of the Global Financial Crisis, there were heightened concerns that a reduced availability of long-term finance and the resulting rollover risks would adversely affect the performance of small and medium-sized firms and hamper large fixed investments. Recently, as corporates of emerging markets have benefited from favorable global liquidity conditions to issue long-term bonds, policy discussions focused on the stability risks of high leverage that could materialize when monetary conditions normalize. What does the evidence on capital structures tell us?
This financial crisis had several negative impacts on banks, financial institutions, households, businesses and the global economy. For instance, many banks incurred substantial losses, and some were even forced into bankruptcy, like Lehman Brothers.
In addition, banks lost a large amount of capital as consumers lost faith in the entire system. The effects of the crisis are shown in the diagram below. Moreover, one of the consequences was that many non-bank financial institutions such as pension funds, insurance companies and finance companies are now subject to stricter regulatory requirements due to the introduction of new rules and regulations.
Furthermore, the financial crisis affected households significantly as consumer confidence fell, thus this reduced consumption.
Consequently, the profits of many firms fell, meaning that they began to lay people off and hence unemployment increased exponentially. Households had a lower disposable income or had to sign up for unemployment benefits.
Unemployment rose sharply in the US and the Eurozone.
In addition, the crisis affected businesses worldwide as the demand for their goods and services fell on account of consumers being reluctant to spend due to uncertainty regarding the state of the economy and job prospects. Hence, the financial crisis affected the economy globally — the total value of goods and services produced fell worldwide.
Consequently, unemployment rose in many countries and government revenues which partially comes from income and corporation taxes fell during the financial crisis. To a large the extent, the crisis was caused by selfish interests.
First, the world of finance and particularly investment banking tends to attract individuals who are hard working, driven and money motivated. Therefore, prior to the crisis, there was excessive risk taking by investment bankers, traders and bank executives.
At the pinnacle of the financial crisis, the bonus culture was predominant and these groups were not focused on building a long-term relationship with clients but instead wanted to sell them as many financial products, particularly loans known as sub-prime mortgages to even the most poorly rated credit borrowers and other complex financial products and instruments such as derivatives.
Whether the client or borrower defaulted, this was of little interest to banks due to securitisation, a type of financial engineering. Securitisation is when an asset or group of illiquid assets are transformed to a security which can be sold to investors.
When these borrowers defaulted and the owners of these financial assets financial institutions, investors, pension funds, insurance companies realised that these products were essentially worthless, many firms incurred losses, individuals loss their homes and were declared bankrupt and many investors also suffered from losses.
Bonuses Besides, many bank executives were focused on achieving sales and bonus targets instead of thinking long-term performance and sustainability. Hence, different interests by not only investment bankers, traders and other parties, but by bank executives and managers too, led to the financial crisis.
Furthermore, credit rating agencies also had a part in it.These are the slides from a revision webinar for A Level economics that looked at some of the major consequences of financial crises.
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This financial crisis had several negative impacts on banks, financial institutions, households, businesses and the global economy. For instance, many banks incurred substantial losses, and some. The global financial crisis, brewing for a while, really started to show its effects in the middle of and into Around the world stock markets have fallen, large financial institutions have collapsed or been bought out, and governments in even the wealthiest nations have had to come up with rescue packages to bail out their financial systems.