Financial Crisis in the Banking Industry (Essay Sample)

Analysis of Current Financial Crisis and its effects on the Banking Industry
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Analysis of Current Financial Crisis and its effects on the Banking Industry
Economists consider the 2007-2008 financial crises to have had the most adverse economic impacts since the great depression of 1930’s (Three Top Economists Agree 2009 Worst Financial Crisis Since The Great Depression, 2009). The 2007-2008 financial crises affected the banking sector worldwide. The largest economic crises hit the banking industry since the great depression. There was a sharp decline in performance for both public and private sector banks. All countries experienced the impact of the crisis. However, some nations were more affected than others. The developed states, for example, the United States and the United Kingdom were more affected than the developing countries.
The UK experienced the first notable event indicating a financial crisis in August 2007. BNP Paribas bank suffered “a complete evaporation of liquidity” (The financial crisis of 2007/2008 and its impact on the UK ..., n.d). This lack of funds led to the restriction of withdrawals from three hedge funds. Investors and savers started liquidating assets held in leveraged financial institutions. The Northern Rock, a small, medium-sized bank in Britain was also a victim of the economic crisis. Due to its highly leveraged nature of the business, it was compelled to request for security from the Bank of England. The demand for security caused investor panic and massive withdraws that led to nationalization of the bank by the government despite earlier reluctance to do so. This acquisition by the government served as an early indicator of the financial problems that would befall other banks, especially in the US. The International Monetary Fund reported that big US and European banks would lose approximately more than $one trillion on toxic assets and from irrecoverable loans between January 2007 and September 2009. The losses were expected to rise to $2.8 trillion from 2007 to 2010 (FACTBOX-U.S., European bank write-downs, credit losses, 2010).
In the United States, IndyMac Bank was the first victim of the financial crisis. Prior to the crisis, it was the largest savings and loan lending bank in the Los Angeles market and the seventh largest mortgage lender in the US. This bank collapsed in 2008. Poor business strategy coupled with the financial contributed to the failure of this bank. This failure is considered one of the biggest bank failures in the history of the US. The financial crisis led to the failure of many financial institutions; some merged under financial distress, and the government nationalized others. A total of Twenty-five banks failed in 2008 (The financial crisis of 2007/2008 and its impact on the UK ..., n.d). The economic crisis has hit the banking sector in the US.
Research has it that if the economic crisis persists, there could be a prolonged recession or worse. The ongoing development of the crisis has provoked fear of global economic collapse in some parts. Notwithstanding a reduction in central bank interest rates worldwide, interbank lending rates have remained high (The financial crisis of 2007/2008 and its impact on the UK ..., n.d). These rates have led to drastic reduction in personal and corporate credit and a rapid downturn i...