Question

How can you interpret a positive sign increase in net error and omission in the BOP?

How do banks become too big to fail?

What was the impact of big banks in 2008 Global Financial Crisis?

Answer 1

1. A positive sign increase in net error and omission in the BOP will increase the balance of the financial account which will lead to an increase in the balance of payments by the amount of increase in the net error and omission.

2. Many very well-known investment bank were heavily invested in mortgage-backed securities. When the mortgage securities market collapsed, the concern was that the confidence in other banks would be destroyed.

When the financial markets panicked; this threatened the overnight lending needed to keep businesses running. The problem had escalated beyond the control boundaries of monetary policy. Banks become too big to fail because of unscrupulous lending practices, illegally foreclosing on homeowners, and laundering money.

3. The financial crisis was primarily caused by deregulation in the financial industry. That permitted banks to engage in hedge fund trading with derivatives. Banks then demanded more mortgages to support the profitable sale of these derivatives. They created interest-only loans that became affordable to subprime borrowers. In 2004, the Federal Reserve raised the fed funds rate just as the interest rates on these new mortgages reset. Housing prices started falling in 2007 as supply outpaced demand. That trapped homeowners who couldn't afford the payments, but couldn't sell their house. When the values of the derivatives crumbled, banks stopped lending to each other. That created the financial crisis that led to the Great Recession.

The panic of the banking sector caused by the credit crash which reached its peak in mid-2007 followed up by the collapse of nonprime mortgages and many other types of securitized products are considered to be the most obvious catalyzer of the global financial crisis.

Over the short term, the financial crisis of 2008 affected the banking sector by causing banks to lose money on mortgage defaults, interbank lending to freeze, and credit to consumers and businesses to dry up.