Impact Of The Crisis On The Banking Industry

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In 2008 the world economy faced the worst global financial crisis since the great depression of 1930’s. The impact of the crisis on the banking industry was critical during this period. From 2007, bank runs began on several British and American major banking firms, but instead of the classic bank run it was as described by Gorton, G. and Metrick, A. (2009) ‘a run on the shadow banking system’. This period was characterised with failure of major banks across Europe and the US. This financial crisis resulted in few takeovers in backing sector and forced governments to rescue the global financial market. In this essay I will discuss what happened during the financial crisis of 2008-09, why it happened, and what questions researchers have…show more content…
In 2008, losses of these securities were estimated to exceed $500 billion. A global saving glut is considered as a factor that contributed to the global financial crisis. In early 1990’s, developing countries such as China used to borrow capital from developed countries. But developed countries suffered currency crisis due to low level of foreign exchange holding and it caused developing countries capital outflow and recession. After the currency crisis, developed countries started managing international capital flows. These countries increased the saving but reduced the investment therefore it caused the current account surplus. Countries such as South Korea and Thailand started holding high volume of foreign currency and it led to global saving glut. It allowed the US to overinvest and in 2002 the US recorded current account deficit of over $450 billion. A factor contributed to the low interest rate was an influx of Chinese capital into the US. Bernanke (2005) suggested the global saving glut helped increase in the US currency account deficit and the relatively low level of long term real interest rates in the world. As a result, global saving glut caused the credit availability and the US housing boom. Sub-prime loan is a major factor that led to the global financial crisis. During the housing boom, mortgage companies sold mortgage
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