argumentative Essay
1770 words
1770 words

Introduction Credit crisis can be simply defined as a situation where there is a lack of funds available in the credit market due to default on loans of the borrower to the financial institution. This situation happened as more borrowers default on their loans and the financial institutions simultaneously will stop receiving a large amount of payments. Then, the financial institutions will reduce the lending or increases the cost of borrowing to a higher rate to recover their loss. When there are limited funds available in the market along with interest rates that is unaffordable to most, it will affect the chances of borrowers to obtain financing and lead to a higher risk to most of the corporate and individual’s exposure to bankruptcy. Finally, credit available in the market had become lesser and lead to the boom of the credit crisis (Investopedia, 2013). The financial crisis of 2007-2008 with the failure of Lehman Brothers is a great illustration of the credit crisis. A sudden change of the financial circumstance in the credit market had started a global financial crisis which has left a significant effect almost every part across the financial world (YaleGlobal Online, 2013). After that, many researchers started to investigate the causes that lead to this credit crisis. Particularly, some of them argue that bank chief executive officer (CEO) incentives are the major factor that causes credit crisis. Bank CEOs Incentives Initially, bank CEO incentives are a kind of performance based bonus aligns with shareholder interest (John and Qian, 2003). Whereby, shareholders gain and falls will affect the incentives of the CEOs. Generally, bank CEO incentives structure has been blamed for leading to the happened of credit crisis becau... ... middle of paper ... ...incentives can be said as one of the factors that lead to the happened of the credit crisis but it is not the major factor that triggers the break out of the credit crisis. Besides that, corporate governance, interest rate and subprime mortgage are factors which causes credit crisis. As refer back to the happen of financial crisis in 2007-2008, these breakout made few large global institution's approach insolvency thus the whole financial sector of the world was affected. The government had given a lot of support to slow down the effect and recovery of the economy in their country. In fact, one factor itself does not cause this mess. The credit crisis is derived from a bunch of economic factors. Credit crisis is a vicious cycle, therefore it is vital to find out the causes which brought to the credit crisis and take suitable solution to solve the problem.

In this essay, the author

  • Defines credit crisis as a situation where borrowers default on their loans and the financial institutions reduce the lending or increase the cost of borrowing to recover their loss. the financial crisis of 2007-2008 with the failure of lehman brothers is an example.
  • Explains that bank ceo incentives are a kind of performance based bonus aligned with shareholder interest, and shareholders gain and fall will affect the incentives of ceos.
  • Argues that ceo compensations aren't a major cause of the credit crisis. fahlenbrach and stulz (2011) oppose that bank ceo incentives affect bank's performance during the crisis, stating that the poor outcomes are not evidence of ceos trying to gain self-interest.
  • Explains that interest rates are a factor that leads to credit crisis. low interest rate encourages investment in assets such as houses and drives up the price of houses.
  • Explains that selling risky subprime mortgage loans also causes credit crisis. the collapse of lehman brothers was due to default on loans where credit default swaps were used.
  • Explains that credit crisis is caused by the failures and weaknesses in corporate governance of an institution. institutional ownership and board independence had an important impact on performance of the firm during the crisis.
  • Concludes that bank ceo incentives, corporate governance, interest rate, and subprime mortgage are factors which cause credit crisis.
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