Financial Crisis and Current Trends in the Banking Industry (Essay Sample)

Financial Crisis and Current Trends in the Banking Industry
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Introduction
In the recent major financial crisis that ensued in 2007-2009, it shook up the edifices set out expressly in the banking sector. Some major alterations were made to make banks pertinent and cope up with the financial crisis. One of the most pretentious areas in banking was the funding pattern developed from the structural changes over the past decades, (Rixtel & Gasperini, 2013). The world is still travailing from the last financial crisis considered to be the worst ever since the Great Depression, (Elasrag, 2010). Even the most industrialized countries in Europe and the United States of America are still besieged to contain the repercussion effects of the economic depression experienced.
Major Sources of Bank Funding
Banks use various financial instruments to fund their activities. Among these sources, include customer deposits predominantly from households, interbank loans, issuance of securities and shares, and mortgage arrangements among other sources. According to Song and Thakor (2010), the financial markets and banks intensified and unified their operations over the past few decades in efforts to change the structure of funding. Globalization of funding also saw banks become interdependent profoundly on an international stage. This also meant that banks could pursue outside sources of funds from foreign grounds to expand their operations further.
Classification of Financial Crises
Rixtel and Gasperini (2013), classify financial crises into three categories, namely, banking, currency, and sovereign debt crises. According to researches done in the past years, currency crises lead the pack in terms of magnitude of occurrence followed by banking crises. Sovereign debt crises occur less frequently than the other two categories. Weakening economy mostly causes the banking crises, which in turn leads to a financial crisis since it directly implicates effects on the banking funding. The banking crises are also encouraged by banks’ overdependence on only definite financing sources.
Trends in Funding Sources
In the times of the financial crisis, banks first had to cut on their interbank unsecured obligations and securities, (Rixtel & Gasperini, 2013). As a result, secured sources of financing have become the main source of funding for banks and in particular, secured bonds. Governments also presumed the role of ensuring that the major banks do not fail since this would mean an economic upset of the country. Therefore, policies as well as measures were devised to uplift and ensure the safety or security of the major banks. Funding markets also became segmented. This means that credit rating was not the only determinant, but also included the origin of the country as well. Institutional investors also abridged their exposure due to the financial crisis.
Any weakness on the side of assets of a bank tends to affect negatively the sources of funding for the bank. The strains in the assets often lead to decline in the value of assets that further leads to balance sheet pressures. Banks therefore resort to debt financing, which is a most risky area. If it is not well monitored, it may lead to future financial crisis and disruptions in bank funding markets. Rixtel and Gasperini (2013), suggest that many financial crises are mainly due to major currencies and maturity incongruities between a bank’s assets and liabilities. In other areas, financial crises are caused b...