Introduction:
The Global financial sector had seen one of the worst Global economic meltdown of staggering proportions. The root cause of the problem was substandard loans offered to a large number of customers with inadequate income by the United States Mortgage market. This crisis was commonly known as the Sub-prime crisis. These sub-prime mortgages were packaged and traded into securitized paper investments and were sold by the major financial institutions across the globe. Subsequently, these investments became non performing assets and infected the worldwide financial markets sparing not even the biggest and established financial firms. Globalization in the early 20th century ensured that the Indian economy and the financial markets
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The main reason for such a hit was because of its rapid and growing integration in the world economy. The Indian banking sector was able to shave off much of the global meltdown. There were several reasons why this was possible, including a conservative approach by Indian banks on providing loans, heavy focus on cost cutting, adhering to the strict guidelines of the Reserve bank of India(RBI) and most importantly exploring only new markets which were immune to Global meltdown. In fact, it was hard to anticipate the overall effect that the crisis would have on the Indian economy. This was because there was no direct exposure of Indian banks to subprime mortgage assets or to any failed institutions. The growth of the Indian banking system was largely because of domestic consumption and investment.
Even though there was little effect on the Indian financial and banking sector because of their limited exposure to troubled assets, prudent policies of RBI and low presence of foreign banks in the Indian market, there was a change in the market condition following the collapse of Lehman Brothers. With regards to the crisis, India saw a reversal of capital inflows due to heavy sell off by Foreign Institutional Investors which in turn made a downward impact on the domestic stock market. This reason coupled with limited access to other external funds exerted tremendous pressure on the FX market since the dollar liquidity was hampered. The chain reaction followed after this and the
The financial crisis from2007 to 2008 is considered the worst financial crisis since the Great Depression of the 1920s and destroyed the U.S. economy severely. It led the housing prices fell 31.8%, the unemployment rate rose a peak of 10% in the United States. Especially the subprime market, began defaulting on their mortgage. Housing industry had collapsed. This crisis was not an accident, it caused by varies of factors. The unregulated securitization system, the US government deregulation, poor monetary policies, the irresponsibility of 3 rating agencies, the massed shadow banking system and so on. From my view, the unregulated private label mortgages securitization is the main contribute factor which led the global financial crisis in 2008.
Financial Crisis of 2007-2008 originated in the United States spread to the financial systems of many other countries, including CIS countries, by means of the domino effect. Bankruptcy of one of the largest Americans Bank, Lehman Brothers Holdings PLC, in someway was a launcher of this global crisis the scope of that can be compared with the Great Depression of the 30s of the last century. No one could have even believed that a crisis in the local market of subprime mortgage loans in the USA would have such enormous affect on the financial systems over the world and crash banking sectors of many countries one by one.
The most commonly known sub-prime finance crisis came into illumination when a sudden rise in home foreclosures in 2006 twirled seemingly out of control in 2007, triggering a nationwide economic crisis that went worldwide within the year. The greatest responsibility is pointed at the lenders who created such problems. It was the lenders who, at the end of the day, lend finances to citizens with poor credit and a high risk of failure to pay. When the Feds inundated the markets with growing capital
Now these financial markets have allowed many to become successful and live the “American Dream,” but have also caused many to suffer and lose everything. Back in 2007, the United States’ economy experienced a large financial crisis that almost paralleled the financial crisis during the Great Depression. Large financial institutions suffered a great deal and the stock market plummeted worldwide. The housing market took a huge hit as well, causing many foreclosures and evictions. This crisis stemmed from a major default in the subprime mortgage market. The bad credit records should have given some forewarning to the looming crisis, but the financial innovation for these mortgages gave investors a chance to succeed in the market. So as a large volume of cash flowed into the United States, the subprime mortgage market took off and became a trillion dollar market by 2007 (Mishkin 208). With prices rising in the housing market, subprime borrowers could simply refinance their houses by taking out even larger loans as homes appreciated in value. These borrowers were also unlikely to default because the houses could be sold off to pay back the loan. This benefited investors since the securities backed by cash flows from subprime mortgages had high returns. And this continued growth of the subprime mortgage market further increased the demand for houses and continued to fuel the increase in housing prices.
The current economic-financial crisis was indeed caused by the simultaneous occurrence of events in different parts of the world that all had a negative effect. These events are subtly different and therefore it is common that only one event is held responsible for the crisis. In reality, the world economy became critical due to the mix of four major events: 1) the unrestrained greed of financiers in the U.S. and U.K., which transformed bad mortgages into toxic financial assets 2) the habit of getting deeply indebted in the U.S. and U.K., 3) the excessive liquidity in Europe, 4) the real estate bubble in the U.S. and some European countries (Thomas, 2011) At the beginning of the financial collapse in the United States, many commentators, among which was the President of the Federal Reserve, hastily affirmed that the situation would only affect the United States and at most, the UK, where the banks,
The Financial crisis has its roots in real estate and the famous sub-prime lending crisis. In 1990, during president Bill Clinton administration, Commercial banks and residential properties witnessed their values increase for almost a decade. Increases in the house market coincide with the lowering of interest rate and lending standards to unqualified borrowers accepting them to take out mortgages whereas at the same time the government deregulations mixed the lines between traditional financial institutions and mortgages lenders. The real estate loans were distributing through out the financial & Banking system in the shape of CDOs and other complex derivatives in order to scatter or spread the risk; however, when home values stopped to rise and homeowners flopped to keep up with their payments and banks were forced to foreclosure their homes.
Over the past two decades, nearly half of the homeowners obtained their loans through subprime mortgage lending. Subprime mortgages were becoming increasingly ordinary in daily life of business for homeowners over the past two decades. However, numerous lending institutions provided home loans to borrowers who have high credit risks and are not be able to payback the loans. New Century, which is the second largest subprime lender in the country, prospered over the last decade. However, its sudden collapse following the restatement of company’s financial statements, contributed significantly to the subsequent events that eventually lead to the plunge of global financial systems in
This almost brought down the world’s financial system, and threatened the collapse some of the large financial institutions. Which luckily was prevented by the bailout of banks by national governments, but left the stock markets to fend for themselves, thus causing global drop. It took huge taxpayer-financed bailouts to shore up the industry. Even so, the ensuing credit crunch turned what was already a bad turn out into the worst recession in 80 years. In 2008 the world economy faced its most dangerous crisis since the Great Depression of the 1930s. The contagion, which began in 2007 when sky-high home prices in the United States finally turned decisively downward, spread quickly, first to the entire U.S. financial sector and then to financial markets overseas. The American economy is built on credit, and because of this credit went unchecked and got out of control. Many people were taking out loans, mortgages became simple. Many people got rich and wanted more. Banks made a cut on the sale, then packaged the mortgage with a group of other mortgages and erased all personal responsibility of the loans. The housing market eventually declined, causing massive losses in mortgage backed securities. Many banks and investment firms began losing money. This also caused a massive amount of homes on the market which lowered housing prices and slowed
This position has given it some of the substantial reasons for it to stir the economies of the world, and in the 1990s, the banks in the USA became the financial instruments for deposits of the surplus from the oil producing countries. The Real domestic product (GDP) began to contract towards the third quarter of 2008, with a gradual annual fall since the 1950s (Suter 45). The capital investments which was on the decline in 2006 matching the 1958 post war record in the first quarter of 2009, dropping by 23.2%. Furthermore, the rising tide on bad debt threatened the solvency of most of the banks. The changes in the Federal Reserve policies created panic in the inter-blending market (Gup 44). This was due to the uncertainty in which banks would survive their tenure in the lending of money to anyone leading to the censure of the economy. The investors in the stock market panicked making them send all their stock shares to a free fall. The decline in the shares significantly reduced the capital shares that greatly affected the bank regulatory system as it is based on the idea that the loans borrowed have to be a certain multiple of the bank capital (Dalton 63). This led to a massive decline in the lending system that significantly threatens the stability of the system. The significant effects of the financial crisis were more apparent was first detected in the US
When sky-high home prices in the United States turned downward, the entire United States financial sector and financial markets overseas faced its most dangerous crisis since the Great Depression. It all began when mortgage dealers loaned home loans to families that did not qualify for ordinary home loans. The terms of these loans were unfavorable the borrowers. These subprime mortgages may have started with low interest rates
In regards to the Financial Crisis of 2007-2009, a few conceivable reasons can be taken into consideration. For instance, high consumer deficit, high corporate deficit, complex money related securities, transient subsidizing markets got to be vital, extensively feeble administrative/business sector controls, shortcoming in the share trading system, shortcoming in the housing business sector, as well as worldwide monetary shortcomings. Besides the previously mention examples, the untrustworthy conduct by budgetary organizations, the disappointment of the national bank to stop lethal home loans, and over-obtaining by consumers can also be incorporated and taken into account. The effect of the monetary crisis from the perspective of firms was that they confronted declining interest for their products. The organizations thought that it was hard to acquire reserves, in light of the fact that the banks' trust in them had declined. Moreover, the organizations confronted solid rivalry from outside organizations. The likelihood of bankruptcy lingered. From the point of view of investors, the crisis implied conceivable loss of stores and loss of avenues to contribute (Carbaugh, 2006). The financial specialists expected to hunt down more
The housing market crash, which broke out in the United States in 2007, was caused by high risk subprime mortgages. The subprime mortgage crisis resulted in a sudden reduction in money and credit availability from banks and other lending institutions, which was referred to as a “credit crunch.” The “credit crunch” and its effect spread across the United States and further on to other countries across the world. The “credit crunch” caused a collapse in the housing markets, stock markets and major financial institutions across the globe.
The U.S. subprime mortgage crisis was a set of events that led to the 2008 financial crisis, characterized by a rise in subprime mortgage defaults and foreclosures. This paper seeks to explain the causes of the U.S. subprime mortgage crisis and how this has led to a generalized credit crisis in other financial sectors that ultimately affects the real economy. In recent decades, financial industry has developed quickly and various financial innovation techniques have been abused widely, which is the main cause of this international financial crisis. In addition, deregulation, loose monetary policies of the Federal Reserve, shadow banking system also play
This chapter is about the background of 2007-2008 financial crisis. The 2007-2008 financial crisis has a huge impact on US banking system and how the banks operate and how they are regulated after the financial turmoil. This financial crisis started with difficulty of rolling over asset backed commercial papers in the summer of 2007 due to uncertainty on the liquidity of mortgage backed securities and questions about the soundness of banks and non-bank financial institutes when interest rate continued to go up at a faster pace since 2004. In March 2008 the second wave of liquidity loss occurred after US government decided to bailout Bear Stearns and some commercial banks, then other financial institutions took it as a warning of financial difficulty of their peers. In the meantime banks started hoarding cash and reserve instead of lending out to fellow banks and corporations. The third wave of credit crunch which eventually brought down US financial system and spread over the globe was Lehman Brother’s bankruptcy in August 2008. Many major commercial banks in US held structured products and commercial papers of Lehman Brother, as a result, they suffered a great loss as Lehman Brother went into insolvency. This panic of bank insolvency caused loss of liquidity in both commercial paper market and inter-bank market. Still banks were reluctant to turn to US government or Federal Reserve as this kind of action might indicate delicacy of
• Nasscom: The global financial meltdown following the collapse of US investment banks will have limited impact on the Indian IT sector in the short and medium terms, but poses a challenge in the long term.