Question

The credit crisis has been touted as one of the greatest threats to the global financial system since the 1930's. It's not surprising, then, that the crisis has also produced unprecedented volatility in the financial markets and large losses for many investors. In the light of the above statement, explain the implications of the financial crisis of 2008, on the stability of global financial markets.

Answer 1

The financial crisis of late 2000 is considered the worst financial crisis since the Great Depression of 1929-30. A spectacular fall in share prices occurred in all major world markets, followed by a series of collapses. Many banks in US & Europe declared massive losses in their yearly results. It started with a crisis in the subprime mortgage market in the United States & later developed into an international banking crisis.

The massive fall in the valuation of securities tied to real estate & banking companies damaged financial institutions globally. Poor bank solvency policies, decline in credit availability damaged investor confidence which affected the financial sector. As credit tightened, international trade declined. The role of credit rating agencies is also questionable as they failed to correctly price risk associated with mortgage-related financial products. This collapse of financial markets resulted in the decline of real economy. It looks like we are headed for a period of inevitable economic stagnation or recession. The crisis uncovered widespread failures in financial regulation and supervision, failures of corporate governance and risk management at many systemically important financial institutions. A combination of excessive borrowing, risky investments, and lack of transparency by financial institutions resulted in a systemic breakdown in accountability and ethics.