Friday, September 27, 2019

Role of commercial banks in causing the financial crisis Term Paper

Role of commercial banks in causing the financial crisis - Term Paper Example On the other side of Europe, the G7 financial ministers have assumed the crisis to be an American problem until much of the European banking system effectively collapsed. In countries such as Germany, the bailing out of the major industries including the Hypo Real estate as well as European mega banks came to hit them hard as they are the big lenders. Other nations like Britain emulated what was happening and commendably made their banking systems to become national. By October 2008 many of the European countries including Canada had gone so far as to guarantee not only the deposits but as well the debts of the banks as well. The financial system in the world is the umbrella body that will be concerned with how all the institutions that deal with finances will work including the borrowing of money in the form of loans that will be repaid in a period that will be short or relatively longer. At times, the webs of debt and credit have always been fragile in times of panic, spreading problems from a part of the global economy to the other. The reason that is responsible for this is that when one link in the very intricate chain becomes weak and breaks and defaults on some debt, it can leave creditors hazardously short of funds, unable to assure the credit of other firms. In this way, the consequences of one failure can spread throughout the entire economy and hence the entire money market (Roubini and Mihm 117) . There are always marketing risks arising when financial institutions trade assets and liabilities as well as derivatives as opposed to holding them for longer investment, funding or hedging purposes, (Saunders and cornett 184). When this happens, the financial institutions are assumed to directly control the maturities of their assets and liabilities as well as the interest issues are concerned. As interest rates fall, many mortgage borrowers seek to repay their existing loans and refinance at a lower rate.

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