Reasons of the Global Banking Crisis 2009



The immediate cause or trigger of the crisis was the bursting of the United States housing bubble which peaked in approximately 2005–2006. High default rates on "subprime" and adjustable rate mortgages (ARM), began to increase quickly thereafter. An increase in loan incentives such as easy initial terms and a long-term trend of rising housing prices had encouraged borrowers to assume difficult mortgages in the belief they would be able to quickly refinance at more favorable terms. However, once interest rates began to rise and housing prices started to drop moderately in 2006–2007 in many parts of the U.S., refinancing became more difficult. Defaults and foreclosure activity increased dramatically as easy initial terms expired, home prices failed to go up as anticipated, and ARM interest rates reset higher.

·        Easy Credit Conditions


Lower interest rates encourage borrowing. From 2000 to 2003, the Federal Reserve lowered the federal funds rate target from 6.5% to 1.0%. This was done to soften the effects of the collapse of the dot-com bubble and of the September 2001 terrorist attacks, and to combat the perceived risk of deflation. Additional downward pressure on interest rates was created by the USA's high and rising current account (trade) deficit, which peaked along with the housing bubble in 2006.

The Fed then raised the Fed funds rate significantly between July 2004 and July 2006. This contributed to an increase in 1-year and 5-year adjustable-rate mortgage (ARM) rates, making ARM interest rate resets more expensive for homeowners. This may have also contributed to the deflating of the housing bubble, as asset prices generally move inversely to interest rates and it became riskier to speculate in housing. USA housing and financial assets dramatically declined in value after the housing bubble burst.

·        Sub-prime Lending


The term subprime refers to the credit quality of particular borrowers, who have weakened credit histories and a greater risk of loan default than prime borrowers. The value of U.S. subprime mortgages was estimated at $1.3 trillion as of March 2007, with over 7.5 million first-lien subprime mortgages outstanding.

In addition to easy credit conditions, there is evidence that both government and competitive pressures contributed to an increase in the amount of subprime lending during the years preceding the crisis. Major U.S. investment banks and government sponsored enterprises like Fannie Mae played an important role in the expansion of higher-risk lending.

Subprime mortgages remained below 10% of all mortgage originations until 2004, when they spiked to nearly 20% and remained there through the 2005-2006 peak of the United States housing bubble.


·        Predatory Lending


Predatory lending refers to the practice of unscrupulous lenders, to enter into "unsafe" or "unsound" secured loans for inappropriate purposes.

There is growing evidence that such mortgage frauds may be a cause of the crisis.

·        Deregulation


Government deregulation and failed regulation of the commercial and investment banking industries were important contributors to the subprime mortgage crisis. These included allowing the self-regulation of Wall Street's investment banks and the failed regulation of Wall Street rating agencies, which were responsible for incorrectly rating some $3.2 trillion dollars of subprime mortgage-backed securities. Effects of the government policies on the crisis was badly effected.

·        Over-leveraging


U.S. households and financial institutions became increasingly indebted or overleveraged during the years preceding the crisis. This increased their vulnerability to the collapse of the housing bubble and worsened the ensuing economic downturn.

         I.    EFFECTS OF THE GLOBAL BANKING CRISIS


·        Impacts on the USA


The 2008 financial crisis is affecting millions of Americans and is one of the hottest topics in the Presidential campaigns. Between June 2007 and November 2008, Americans lost more than a quarter of their net worth. By early November 2008, a broad U.S. stock index, the S&P 500, was down 45 percent from its 2007 high. Housing prices had dropped 20% from their 2006 peak, with futures markets signaling a 30-35% potential drop. Total home equity in the United States, which was valued at $13 trillion at its peak in 2006, had dropped to $8.8 trillion by mid-2008 and was still falling in late 2008. Total retirement assets, Americans' second-largest household asset, dropped by 22 percent, from $10.3 trillion in 2006 to $8 trillion in mid-2008. During the same period, savings and investment assets (apart from retirement savings) lost $1.2 trillion and pension assets lost $1.3 trillion. Taken together, these losses total a staggering $8.3 trillion. Members of USA minority groups received a disproportionate number of subprime mortgages, and so have experienced a disproportionate level of the resulting foreclosures.

·        Impacts on the Developing Countries


A year on from the collapse of Lehman Brothers and talk in developed countries has moved from recession to recovery. Recent OECD and International Monetary Fund reports suggest that financial conditions in developed countries have improved: there has been a boost in business confidence, export orders are growing, the US housing market has bottomed out and industrial production in emerging markets has begun to increase.


·        Impacts on the Poor Countries


Unemployment


Unemployment highly increased in the world and its very important problem.

Poverty


While the repercussions of the financial crisis on poverty in the developing world are severe and likely to worsen, the response to date by governments and donors has been marginal.

The World Bank estimates that the crisis: financial collapse, combined with the food and fuel price crises, increase the number of poor by between 53 and 64 million people in 2009, based on estimates of those on less than $2 a day and $1.25 respectively. The UK Department for International Development, meanwhile, estimates that an additional 90 million people will be living on less than $1.25 a day by the end of 2010.

Loss of income in a poor household is a serious shock. Obviously, it increases poverty in that household. It also makes it more likely that the wider community will become poor. It undermines a household’s ability to buy basic supplies, and can lead to ways of coping that will derail family well-being in the longer term, such as pulling children out of school or cutting back on food. These strategies undermine the younger generation’s chances of moving out of poverty or contributing to economic growth. It may push vulnerable households into a vicious cycle of chronic inter-generational poverty.


Prices


Poor people will also be affected by changes in prices as a result of the financial crisis. Changes in both consumption and production prices affect net consumers and net producers in different ways. In countries that distinguish between aggregate and food-price inflation, the latter tends to be higher. Persistently high inflation, in particular on food prices, will challenge food security and reduce the resources poor consumers can spend on non-food items, such as education and investment.

Private and Public Transfers


Reduced public revenue and an expanding debt are increasing the pressure on government budgets. How governments reprioritise public spending across regions, vulnerable groups and over time will shape the short and long run impacts of the financial crisis on growth and poverty.

Assets and Good and Services


The provision of goods and services by governments, NGOs and the private sector may be waning as a result of falling revenue. In Uganda, for example, NGO revenues are reported to have fallen by over 5% in the space of a year with the decline more pronounced since October 2008. Reductions in both service provision and uptake are likely to deepen as the impact of the crisis works its way through the economy.

Some countries are seeing strong economic growth transformed into negative growth in 2009, others see significant slowdowns of 3-7 percentage points, though some have hardly been affected.

        
COMPARING THE RECENT CRISIS TO THE PAST


If we compare today crisis to the Great Depression we say there are some similarities. Both crises were caused in part by insufficient regulation, as well as imprudent lending by inexperienced and often fraudulent parties which were dealing with untested lending products. Both crises were all-time lows for Wall Street and both were triggered by speculation, unregulated financial markets, and a failure of confidence.

And these crises have some differrences. Current banking crisis is much larger than the Great Depression in scale. More bank branches in 2008-2009 banking crisis than Great Depression.

2008-2009 banking crisis far exceeds from past crises.

Even when adjusted for inflation and population growth, the 2008-09 banking crisis far exceeds previous banking crises, including even the Great Depression. There were 10,000 bank failures in the Great Depression, but few of them had branches.

Today, a medium sized bank usually has hundreds of branches and the two big failures, Washington Mutual and Wachovia Bank had more than 8,000 branches between them.

Four more banks went into Federal Deposit Insurance Corp. receivership on Friday, bringing to 81 the total of FDIC actions in 2009. Including FDIC bank closings in 2008, the total for the current financial crisis is now 104. Assets of these 104 banks totaled $146.7 billion.

The S&L crisis was about five times bigger than the banking crisis of the Great Depression. The current crisis is about 25 times larger than the Great Depression. Both are per capita, adjusted for inflation. The current crisis is so large because the financial sector has grown to unprecedented economic dominance. The financial sector constituted 45% of earnings for the S&P 500 in 2006.

If we compare the Assets/GDP ratios, we see that in the 2007-2009 crisis this ratio is much more than the other crisis. Following tables are showing that:







         






SOLUTIONS OF THE GLOBAL BANKING CRISIS

We propose three aspects of the system for dealing with banking problems:

·        Deposit Insurance


Deposit insurance is needed because it is impossible to avoid a commitment to protect depositors. This commitment cannot be avoided, for both political and economic reasons. The public expects that its money will be safe with any bank that has a banking license. Thus, in the event of a bank failure, it is politically damaging for the government of the day to allow small depositors to suffer losses. This is not quite inevitable; small depositors have on occasion lost money. But it is difficult to avoid.

The deposit insurance fund must be further supported through a guaranteed first line of credit from the central government so that it can deal with a bank failure larger than the amount in the fund. In the event of such a call in which the fund is forced to use this line of credit, insured banks will then be required, after the event, to pay relatively high deposit insurance premia, and if necessary a special levy, to restore the fund within a reasonable time frame.

·        Bank Support


We now turn to the second element of reform: clear but strictly limited procedures for the provision of financial support. As our previous discussion makes clear, offering bank support is not a lender-of-last-resort operation; it does not involve providing liquidity to the market as a whole to prevent a run for cash. However, it is also clear that the option of letting any bank in liquidity difficulties fail may create both inefficiency and systemic problems.

·        Prompt Closure and Payout


Our third provision in bank crisis resolution is the need for special procedures for intervention in a financial institution to resolve its financial distress and make a rapid payout to depositors. At present, this is not possible in the United Kingdom because closure follows standard U.K. corporate insolvency law: A creditor applies to put a business into administration, and the provider of liquidity support and the deposit insurance fund then have no preference over other creditors.


Yorumlar