Question

how did the financial market 2008 crisis impact the banks?

Answer 1

After the 2008 financial market crisis, the primary impact that had on banks were risk aversion from credit offerings to customers. The banks started focusing on their asset quality and therefore their lending ability get reduced quite rapidly. The size of balance sheets shrunk to its lowest for some of the banks and for some it was reduced. This has seriously impacted bank's profitability and earnings. Due to strict rules framed by the government and fed reserve because financial crisis, has led to slow growth in lending. The investors and general public started to doubt the validity of private banks and their deposits have seen a hit. The new basel III norms of banking has compelled banks to keep a higher capital adequacy ratio as compared to before. A deflation in the country has led to a decline in the fed funds rate and bank rate to a very low level, investors were getting subpar returns in bank accounts resulted in departure of funds from bank accounts to other high return generating assets. The immediate impact of such crisis on banks were that they started loosing money on mortgage defaults, real estate lending payments dried up due to lack of earnings, inter bank lending almost stopped, banks were not ready to lend each which resulted in expensive credit for consumers that too was not available easily.