Financial crisis refers to the loss in the value of assets in the financial term. The financial crisis includes recessions, panics, crashes of the stock market, bubbles, etc. Banks are one of the main sectors for business activities. Due to the financial crisis, there exists some banking crisis due to the decrease in growth and credit. This finance topic is also an important one for college students. Understanding such types of finance topics is not an easy task for every student. Many students hire financial homework help service to accomplish their financial homework assignments.
Causes of the Financial Crisis
There are different reasons for the financial crisis in the economy for example- leverage, taxes and subsidies, liquidity, etc. if the assets are overvalued then also financial crises can arise. Also, the unanticipated behavior of people results in the risk that arises in the banking sector. Incentives also, system failures, etc can be the reason for the crisis. If the crisis left unchecked and continues to the future then it will be the reason for the recession in the economy. The reasons behind the financial crisis include- the excessive overload of the economy with money, the rise in the number of credits assigned, Self-destruction of the financial debt, the Underestimation of financial risks and the division of the financial market from the economy.
Effects of the Financial Crisis
The global financial crisis also affected the banking sector. The financial crisis results in banks run short of money in several ways and these results in some banks may go out of business. This kind of shortages has a huge impact on savers, businesses, etc. this affects the growth of the economy negatively and also unemployment.
Due to the crisis, the banks reduce lending because they don’t have money for funds for the investment. The profitability of the banking sectors also weakened. The financial crisis may cause inflation in the economy.
The slower rate of growth increases credit risk. Banking sectors depend on some risks which are very weak. This weakness leads to different kinds of risk-liquidity risk, interest rate risk, credit risk, etc. when this kind of risk arises at the same time then there arises a crisis in the banking sector. These kinds of risks arise because of the high rate of the leverage ratio and it is not matched with maturity. So these situation leads to cut funding of the lenders.
The capitalization of the market of banks decreases. The value of the shares also has fallen. This crisis in the banking sector leads to the crisis in the other sectors of the economy like – production sector, etc. there leads some structural changes related to the monetary financial institutions.
Impacts of the Financial Crisis on the Banking Industry
There is a decrease in the funds for investment. So there is a shortage in the liquidity and also the less money to lend out. The investments lead to a negative effect in a cyclical way. So the decrease in the investment in cyclical ways decreases economic growth.
During this crisis period, to solve the problems related to the banking industry, there must be an increase in the capital ratio, the implementation of some regulations can also improve the situation. The incentives related to the private sectors to monitor the banking situations can also reduce the risks during the period of crisis.
The strong regulation and supervision of the banking sector can be helpful to overcome the situation of the financial crisis. There are some anti-crisis measures like- increase in the liquidity of the credit of the institutions, stability of the banking and financial sector, allocation of the public funding to support the banking system.
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