Analyze Current Financial and Banking Industry (Essay Sample)

Analyze Current Financial and Banking Industry
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Introduction
The effects caused by the financial crisis have proved its severity on many banks. Many banks experienced bankruptcy while others are in distress as a result of their sensitivities. Recalling that the entire risk is the addition of two parts including sensitivity and volatility, it is taken that the degree of banks being affected by the financial crisis is mainly dependent on their risk sensitivities. The present financial crisis has exposed considerable weaknesses in risk management practices throughout the financial services industry (Berlatsky, 2010). The current financial crisis has heavily weakened the US banking sector. The number of bank collapsing has gone up, and it continues to persist. Bank stocks dropped. In reaction to both the dire banking sector conditions and the significant economic recession, banks stiffened their lending standards and terms to exceptional levels. Financial crisis denotes the period when financial assets abruptly lose a significant part of their nominal worth. The essay will analyze the banking industry and the current financial crisis (Dolezalek, 2012).
For the past two decades, financial risk management has become a vital aspect of financial institutions and companies. Financial innovations have led to the effectiveness of risk management practice, consequently imposing greater challenges for market supervisors and their participants in the systematic risk areas. A vital feature of financial innovations periods is that the fast increase of new products and the structure changes of these markets can outdo risk management development and settlement and processing infrastructure (Berlatsky, 2010).
The present financial crisis begun in 2007 August, and has been measured to be the worst since the great depression by Alan Greenspan, George Soros, Jean-Claude Trichet, Joseph Stiglitz, and IMF. Financial crisis is used mainly in situations where financial assets abruptly lose an enormous fraction of their nominal value. There are various factors that contribute to financial crisis including improved innovation in commercial goods and their increasing complexity, inappropriate supervision and regulation of financial markets, and lax or inadequate risk management application in banks and other financial organizations. Financial crisis makes the banking sector tighten its loan rate (Shiller, 2008). Tightening loan is assumed by big banks while small charge more. The method banks apply to adjust loan rates involves reducing large loans discount and increasing premium associated with risky loans. Non-commitment loans also increased than commitment loans, but immediately decreased after emergency liquidity facilities were introduced (Dolezalek, 2012).
Financial crisis also poses a tremendous risk to MTM gains. MTM gains denotes sum of assumed benefits associated with security trading, changes assumed in fair value of the held-for-training securities, changes related to fair worth of derivative position and changes related to fair worth of existing-for-sale securities or loans. The current financial crisis led to a loss of MTM gains in all EME banks. Financial crisis experienced has also led to tumbling of the median wholesale growth funding. The growth fell to about 20 percent and increased in big banks. Big banks were, however, affected in regards to wholesale funding. Small banks continued to increase their wholesale funding while big banks deteriora...