Question

critically evaluate the impact of the recent financial crisis on modern risk management practices and comprehensively understand the changes which are currently being introduced into financial markets to comply with the new, post-crisis regulatory financial reform

Answer 1

The recent global financial crisis of 2007-2008 has been started with the burst in the real estate market in 2007, which force to fail the mortgage credit and capital markets, extend all over the globe, with the enormous demolition in price of Financial (equity) and real estate assets. The global economic crisis, 2007-2008, is a case of huge pursuit of greediness at the cost of prudence, and regulation. The financial crises of some or the other types occur infrequently almost every decade and in different countries around the world. Financial meltdowns have been reported in many countries, from Russia to Korea, from the United Kingdom to Indonesia, from Sweden to Argentina, and from Japan to the United States.

Although each crisis is unique, yet each bears several similarities to others. In common, economic crises have been created by factors such as extreme leveraging of debt, wrong interpretation of risk, overheating of markets, swift outflows of wealth from a country, credit booms, weak macroeconomic policy, off-balance sheet operations by banks, use of new and inexperienced financial instruments and deregulation in the absence of adequate market monitoring and oversight. It is very much true that people who work against the rules generate consequences similar to a pebble thrown in the water, its ripples go outward. Wall Street participants worked against the financial regulations and the global populations are being called upon to bear the brunt of it. This economic crisis impacted investor confidence to trigger mammoth sell offs in exchanges almost all over the globe. The financial markets, which were highly integrated into the global market, got the first hit. Even the markets, which were not much integrated, adversely impacted due to the spread of the crisis through the real economy sectors. The real sector spread of the economic crisis has manifested itself in the fall of exports and prices due to the sprawl in global demand, a decline in foreign direct investments (FDI) and investment flow. On the financial context, the global economy crisis force to raise the cost of capital in the credit market.

The global economic crisis has hit every region of the globe unlike any other depression before. The impact of the global slump accelerated by misfortunes of many European and American investment banks, which had reported enormous losses due to high exposures in the mortgage and mortgage backed securities market.

The crisis revealed weaknesses and lope holes in existing financial regulatory policies and institutions, some new policies in the financial field to impact are,

• ‘studies of policy instruments and implementation’’
• policy ideas and formulation
• Banking reforms policy (the Basel III framework)
• Financial Stability Board has bee formed by G 20