The financial crisis in 2008 that led to a crisis in the banking sector, and which nearly led to a complete collapse of the economy globally, was not only caused by changes in the regulatory, regulation and legislation oversight, but also fiscal and monetary policies. Many believe that, expansion of excesses monetary and irresponsibility of some of the government agencies led to the crisis. According to reports by Taylor (2009), excesses monetary policies were the main cause of the 2008 financial crisis. He reports that, in 2003-2005 the federal reserves held its interest rate target below the well known monetary rules that state that historical experiences should be the base of a good policy. He says that, Federal Reserve tracked their rates according to what worked better in the earlier decades, instead of lowering the rates in order to prevent the crisis.
Background and Motivation Looking at the contradictory results of prior research on bank capital structure, banks seem to face conflicting goals emanating from shareholders, debt holders and regulators (Gropp and Heider, 2009). Shareholders aim at maximizing the return on the equity invested. Therefore, they implicitly get along with as small equity capital as feasible to achieve their objective. Debt holders have different goals to minimize the riskiness of assets as opposed to raising new e... ... middle of paper ... ...erican Economic Review, 48 (3), 261-297. Moyer, S. (1990) “Capital Adequacy Ratio Regulations and Accounting Choices in Commercial Banks”, Journal of Accounting and Economics, 13 (2), 123-154.
Economic uncertainty has caused exaggerated criticism of the Federal Reserve. Money and Banking has deepened my understanding of the Federal Reserve and has helped me challenge those criticisms. The U.S. standard of living would drop if people lost faith in the safety of financial institutions. Frederic Mishkin makes the point in the text, The Economics of Money Banking, and Financial Markets (2010) that “Banks and other financial institutions are what make financial markets work. Without them, financial markets would not be able to move funds from people who save to people who have productive investment opportunities.” (p.7).
The credit crisis is referred to as economic downturn by credit squeeze, provision of doubtful debt and bankruptcies among others. (IMF, 1998) Credit crisis is known as a credit crunch, it is an extension of recession. According to the Ocaya (2012), Credit crisis is a sudden shortage of loan and tightened the requirement of economy and society needs of getting loan from financial institutions. In such situation, lender started keeps the cash and stop lending money because they are worry about a large of debtor bankrupt and mortgage defaults. Lender had adjusted the interest rate of borrowing to unaffordable rate.
The article is discussing of bank deposits and loans in the monetary transmission mechanism. It would lead the financial system to achieve monetary stability and creation of sound financial structure. The monetary policy implemented by bank can influence the real economy through monetary transmission mechanism such as money channel and credit channel. For example, in the short run, bank may sell off their securities holdings to deal with liquidity problem while loan in economy still remained the same. However, loan termination and halt to new loan supply may implement by bank due to contractionary monetary policy in the long run which lead to decline in the aggregate economic output.
Introduction The sovereign debt crisis in the euro area has revealed that the monetary and fiscal policy framework of the European Monetary Union (EMU) is still incomplete, (Gianviti et al, 2010). They further state that Eurozone’s institutional policy arrangements, regarded by many economists as ineffective are being subjected to tests in the extreme and have fuelled the financial crisis. According to (Higgins & Klitgaard, n.d), the countries that were most exposed to the devastating effects of the euro area sovereign debt crisis had engaged in substantial foreign borrowing in the run up to the crisis. The turn to foreign borrowing was facilitated by their entry into the European Economic and Monetary Union, a move that enabled the periphery countries to gain unprecedented access to credit from other euro area countries at relatively low interest rates, as compared to before they were admitted to the euro zone. (Alessi, 2012) explains that this lower interest rates and liquidity led to an accumulation of unsustainably massive sovereign debts and deficits that posed a threat to the feasibility of the Eurozone.
There are certain tools that the central bank uses to have control the economy of the country. There are two types of tools that are conventional and the non- conventional tools: A. Conventional Tools • Repo Rate and the Reverse Repo Rate: a. Repo Rate: It is the interest rate that the bank has to pay when it takes any credit from the Central bank. b. Reverse Repo Rate: It is the interest rate that the RBI has to pay when it takes any credit from an... ... middle of paper ... ...ON: Alesina, A, and R. Perotti,(1997) “ Fiscal Adjustments in OECD Countries: Composition and Macroeconomic Effects.” IMF Staff Papers,92,571-89 Aschauer, D.A.
INSTABILITY IN FINANCIAL MARKETS In this section I examine four interpretations of how financial instability arises. The first interpretation deals with speculation and the subsequent “bandwagoning” in financial markets. The second is a political interpretation dealing with the declining status of a hegemonic anchor of the financial system. The question of whether regulation causes or mitigates financial instability is raised by the third interpretation; while the fourth view deals with the “trigger point” phenomena. To fully comprehend these interpretations we must first understand and differentiate between a “currency” and “contagion” crisis.
Credit risk, was the initial concern of Basel I, it is the risk associated with borrower’s default, a factor that might push the bank in question into liquidity or insolvency crisis. Therefore it focuses on the probability of default and t... ... middle of paper ... ...atory decision in one country might affect safety-net cost of other countries (Caprio, Kun & Kane, 2008). Works Cited Caprio, G., Kun, D.A., & Kane, J. E. (2008). The 2007 Meltdown in Structured Securitization: Searchin for Lesson Not Scapegoats. World Bank Policy Research Working Paper, 4-51.
This research will focus on the history and effect of financial crisis and the application of Fair Value Accounting in the financial institution during this financial crisis. II. The Financial Crisis and The Fair Value Accounting II.1. Financial Crisis II.1.1. The History According to Arnold (2009, p.803-809), subprime mortgage defaults in the United States was the first problem in this current financial crisis, then bubbled damaging cris... ... middle of paper ... ...tion.