Essay Sample on the Aftermath Remedies of the 2008 Crisis

Published: 2023-01-05
Essay Sample on the Aftermath Remedies of the 2008 Crisis
Type of paper:  Essay
Categories:  Policy United States Banking Money Debt
Pages: 7
Wordcount: 1793 words
15 min read

The financial crisis of 2008 is considered to be one of the worst financial crisis after the Great depression of 1929. Recovery strategies are still ongoing a decade after the financial crisis. The crisis caused a global banking disaster, falling of house prices, falling of stock markets and high job losses. The crisis started in the United States and spread globally to countries such as China, Japan, and Europe. Deregulation in the housing market, investment banks, derivatives market, insurance companies, and rating agencies caused the crisis. The crisis caused a significant blow such that the economy to date is still recovering and implementing measures. The legal framework and financial system in the United States are still not stable, and wealth distribution is unequal. This paper shall look at the remedies, policies imposed and recovery form of the 2008 financial crisis.

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The 2008 financial crisis was caused by the failure of regulation in the various markets. There were no requirements for equity capital which would be used in investments. The deregulation of banks made them become Universal and participate in financial markets. The absence of regulation of investment banks made it possible for its participation in commercial banking. Therefore, the investment banks and universal had a combination of both liquidity and credit risk. The banks which were subject to liquidity risk now added credit risk while investment banks which had credit risks now added liquidity risks. The deregulation brought the exposure of balance sheet to crashes and led to the addition of financial risks.

The collapse of the global bank of the Lehman brothers saw the world's financial system go down. The financiers, central bankers, and regulators were to blame for the crisis. The bankers worked with corrupt rating agencies. The rating agencies were aware of the enormous risk involved and still allowed the conducting of business in fear of losing clients. The low federal funds encouraged firms to construct complex products which were incomprehensive for outside investors. New financial instruments were now reassessed to reduce the complexity and investors could now understand the nature of financial instruments.

The fall of the Lehman Brothers and Washington Mutual raised concerns about the health of financial institutions. The Federal Reserve began buying bonds to boost growth. The Federal Reserve took over Fannie Mae and Freddie Mac which were mortgage companies and were illiquid. The crisis saw the closure of 6 million houses up to 2010. The losses through credit default swaps saw the takeover of insurance companies. The banking system required $ 700 billion to regain from its crisis.

The Central Bank imposed liquidity requirement to prevent another liquidity crisis from occurring and causing bank failure. The government introduced guarantees on deposits to avoid the collapse of the interbank market. The government also ensured the recapitalization of banks to prevent other bank failures. However, the capitalization by the banks proved insufficient as the government needed to provide new equity to counter write-downs of the banks. The banks became reluctant to extend new loans due to the policies imposed.

The Post Crisis implementation policies brought about the Dodd-Frank Wall Street Reform and Consumer Protection Act which emphasizes the systemic risk and financial stability of financial institutions. The current framework brought improvements to the banking sector which brought better capitalization and less dependency on funding. The Act enacted measures related to bank practices and provisions to the derivatives market. The task of formulating standards into regulations was left to the regulatory agencies. The Act authorized the safety and soundness of banks through capital and liquidity requirements of banks.

The regulation also seeks to implement market discipline in terms of competition and encourage innovation which brings growth and development. The provision was a success to most financial institutions and improvement could be seen. The new regulations, rather than have lists of discretionary measures which may cause regulatory arbitrage, should set general principles. The framework however still faces threats outside the perimeter of the funds due to political pressure to which its sustainability is questioned. However, even tight regulations do not ensure that there will be no financial crisis.

Three post-crisis achievements are evident; Improvement for financial institutions, tiering of financial institutions and resolution strategies for falling and dissolving banks. The improvement of financial institutions has been ensured through higher capital requirement, more sources of funding and better management in bank practices. High capital requirements ensure the externality related to shock is reduced, and financial institutions continue to provide credit times of crisis. The new policies saw the increase of risk-weighted capital requirement of equity rise by 4.5% and a 2.5% buffer. A financial institution that falls close to the buffer range should limit its amount of capital distribution. The Basel committee also established a requirement on the leverage ratios that includes asset approximation of all securities, derivatives and off the balance sheet items.

The Dodd-frank Act requires that large banks have a minimum capital requirement based on risk weights and should not rely on subjective ratings. The Act also requires stress tests to be performed in banks. Stress tests would ensure the worst economic scenarios are looked at and their impact on assets and earnings on banks. Among the post, crisis policies were the increase of the risk-weighted equity ratio by the Federal Reserve Bank of New York rise from 7% to 13%. Banks are also required to have risk management systems to monitor risks in all business segments. A 30-day self-funding by the banks was required to ensure effective and sound crisis management program in periods of a stress test. However, the regulation imposed on the liquidity of banks may cause the banks not to utilize their cash during stress periods. The banks may, therefore, sit on the liquidity rather than use it for the shortage.

A resolution strategy for failing banks was established. An orderly resolution would ensure that a big firm does not fall. The Act included that the failing bank should be granted access to the Treasury so that it may request funding. The Federal reserve also required that banks hold assets of long term debt which may be converted to equity during a bank failure. The Dodd-Frank Act required that a planning process for resolution be established to ensure that managers are not reluctant to utilize the long term debt to boost the bank.

The post-crisis financial regulation focuses on risky practices by banks. The focus on only unsafe practices has led to the degrading of the increased resiliency of banks and failure to observe risks to the financial stability of non-financial institutions which borrow and lend.

A post-crisis policy saw macro-prudential measures being imposed on banks. The macroprudential measures on stress tests incorporate features such as measuring the effects of stress tests on the balance sheets. The proposal would ensure that banks continue lending to borrowers even in periods of recession. However, the macro-prudential measures were underdeveloped. Analytic work is needed in system feedback into a flexible and sound regulatory framework. The main issue in macro-prudential measures was liquidity and funding regulation. The funding of large banks through the implementation of the standards has seen the profile of funding look much healthier.

The Dodd-Frank Act established that regulations should vary with bank size and systemic importance. The rules would change with the size of risks carried by the various groups of banks. The Act required that capital and liquidity for banks with more than assets worth $50 billion to prevent threats to financial Stability of the United States.

The election of Barrack Obama was also a great response to the financial crisis of 2008 besides it being an electoral pattern in the United States. The election brought a tremendous political effect on the financial crisis - the administration shifts more attention to the health sector. The selection saw the injection of $787 billion injected into infrastructure, tax cuts and grants to state organizations. The election also brought policy change in the education sector, health sector, tightening of regulations of financial institutions. (Bartels, 2013) mentions the conflicts of Republicans and Democrats and disputes whether or not the country was improving after the elections. (Bartels, 2013) examines political parties and public opinions to look at the division of the United States during the recovery period.

The injection of money into the economy brought more favorable economic conditions as seen at the time of the midterm elections. The initiatives saw the Gross Domestic Product rose by 4.9% in 2009 and 6.6% in 2010. However, the real incomes rose by less than 1%, and the unemployment levels still stood at 7.8%However, the mid-term elections saw the United States citizens punish Democrats for the slow economic recovery. The change in economic development after the election in 2008 saw Obama get re-elected in 2012.

The crisis saw Basel I impose capital ratios on banks based on asset classification according to the risks. Basel, I also required a capital set aside on the assets based on risk. Basel, I made possible the treatment of insured assets like government securities, and this enabled the explosion of credit default swaps. The Basel approach attempts to apply methods to risk evaluation which are used to calculate capital ratios. However, Basel impositions led to fewer profits by banks but also fewer risks faced. Accounting standards and gaps due to the valuation of products was changed as it was a significant issue in the financial crisis. Disclosure practices needed to be improved. The crisis also called for the transparency and standard disclosures of off the balance sheet items.

(Milan, 2015) suggested that the existing system be disregarded of the debt contracts and debt be refined with debt forgiveness. (Milan, 2015) proposed that there should be equity financing instead of debt. (Tarullo, 2019) suggested that there exists unfinished business with regards to regulation by the government. (Tarullo, 2019) suggested that the regulation and short term financing will lead to the next crisis.

The 2008 financial crisis surprised the investors, policymakers, academics and rating agencies. The Federal Reserve Bank, Federal Deposit Insurance Institution and the Treasury aided to keep sound and stable financial systems of financial institutions. The remedies to the crisis, however, have been disputed. A survey showed that 70% of the United States citizens found that the gap between the rich and the poor had still widened. Little attention was given to risks outside the boundaries of banks. The improvements of the banking institutions were also considered to degrade with time. Macroprudential measures have also been questioned in their development in issues such as the rise of the price of assets in proposals to increase the resiliency of financial institutions.

The policies and measures imposed after the great financial crisis of 2008 have shown improvement of financial institutions and the market in general. The election of Barrack Obama also saw the United States' economy recover from the financial crisis. A decade after the great depression, measures are still being implemented to avoid such a mess.

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