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Financial Crisis

Financial Crisis in Different Countries

INTRODUCTION

The global financial crisis has affected economic to a great extent during middle 2007 and 2008 because of this stock market has been fallen. It has direct relevance with monetary policy of country thereby overall performance of country get affected. In UK, ineffective innovation and deregulation results for financial crisis in banking sectors. Here, banking sector put efforts in order to get competitive edge but also they support each other by the help of inter bank lending. Because of the interconnected network of banking sector, effect in one bank lead to have effect on its connected organization that results financial crisis take place that decreases money value (Acharya and Merrouche, 2012). Present research is based on causes of recent financial crisis in different counties. In US it was started with loss of US housing market, excessive land use regulation and low interest rate in banking sector. Because of this, crisis went from houses to money market and ruin overall development of country.

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Significance of the study

The present study is of significance due to increasing impact of financial crisis on economy of different country. As the financial crisis hampers overall progress of country and also create uncertainty for future span of time. Further effect of financial crisis spread at rapid speed the ruin overall growth of different counties because of creating huge loss in several sectors such as banking and housing. Owing to this, present research is being conducted that aid to highlight causes behind recent financial crisis. It will assist management or regulatory authority to adopt effective control measure and take into account these issues in order to ensure certainty for the future. Also, current research will prove to be effective to address the issues of financial crisis for future span of time.

Aim: To evaluate causes of the recent financial crisis in different countries

Research questions: The research questions for the present study are framed as follows that will help the scholar to conduct the study in hierarchical manner:

  • What are different causes of the  recent financial crisis in different countries?
  • What is the impact  recent financial crisis on economic growth of  different countries?

LITERATURE REVIEW

Financial crisis has direct relevance with financial assets that affect overall growth and development of country to a great extent. The world financial crisis are related to banking, stock market crashes and currency crisis. Subprime mortgage crisis was occurred in UK in 2007 by which home prices was declined. According to Alicia (2006) housing value never go down and keep on increased with demand. It is because, increasing population tend to purchase the houses on the basis of their requirement that enables them to make their effective financial management structure. But this assumption turned to incorrect in 2007 due to number of reasons (Alicia, 2006). As per the views of Barangayrp (2008) banking industry was at fault because management was not able to know the ability of owners to make payment for mortgage. It increases the loss amount that leads to increase debt that have impact on overall economic growth of America. It has also created huge loss for the home owner who has planned to sell their houses on increased prices. It is because people tool sub prime crisis based on low payment but the same had negative impact during to financial crisis. Here, investors or home owners faced difficulty for paying monthly mortgage on right time due to high decline in the prices of home (Barangayrp, 2008).

On the basis of views of Blackburn (2008) creation of huge money by banks attract number of people to take loan that also increases chances of debt for banking industry. In such condition large amount of money was landed in the property market that aid rise in the prices of houses. Here, increasing amount of debt make investors unable to pay the loan which create barrier in repayment of loan amount. Under such circumstances, bankruptcy took place in banking sector of country (Blackburn, 2008). Goodhart and Lim (2011) stated that, increasing debt forced people to sell their assets in order to make payment of their loan amount that decreases the prices of housing to a great extent. After the financial crisis, banks reduced to lend the money which create critical situation in the country. The sub prime financial crisis also had impact on United Kingdom that slower the growth of several industries (Goodhart and Lim., 2011).

Goda and Lysandrou (2014) stated that asset credit boom or rapid expansion of credit played significant role in financial crises. In this regards, there was too much growth in credit identified in the variois European nations such as U.K., Iceland, Ireland, Spain along with various Eastern European countries that had boost up the growth real estate (Goda and Lysandrou, 2014.).

Naija Lo Wa, (2009) evaluated that huge growth in creadit was not be influenced by periodic growth. Author further argued that it was occurred by a large cyclical fluctuations in economy of different nation that promoted low interest rates and huge mortgage financing (Naija Lo Wa, 2009).

The study of Davidson (2008) determined that historically there were not all credit booms end up in  the form of a crisis. In addition to that the chances of a crisis might be increased with a long duration and large size boom. Author further argued that credit booms could develop a mechanisms for crises by increasing in the leverage of borrowers and lender along with reduction in lending standards (Barangayrp, 2008).

Blackburn (2008) examined that in the recent crises, both channels had performed their role for developing of basis of financial crises in different parts of world. Here, Leverage increased due to inadequate oversight that had left various households vulnerable to a downturn in house prices along with tightening in credit expansion as well as slow down financial operations(Chong,  2011).

The research of Demyanyk (2009) found that rating agencies were also held responsible and played vital role in financial crisis. In this aspect, rating influenced sub prime lending in US. UK etc. by presenting improper review of capabilities, credit boom etc. In regards Chari and  Kehoe (2004.) determined that  rating agencies had predicted the high default rates for subprime borrowers. Author further argued that if rating firms had provided lower ratings to these CDOs as compared to “AAA” rating then investors would avoid these high risky securities and the financial losses of people and economic downturn would not have been so bad (Goodhart and Lim (2011).

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Acharya and Merrouche (2012) analyzed that conflict of interests among various rating organization has become an important factor behind the crisis. They and their study found that the rating agencies were forced by their management to provide  better ratings that maintained profitability of firm by continually receiving service fees or they managed the risk of the underwriter going to a different rating agency. In such situation relationship between underwriters and rating agencies can be considered as bringing bonds to market with reference to market demand.

Demyanyk (2009) stated that before the many years of financial crisis, various countries had been   facing problems of current account deficits due huge variation in import and exports of nation. Researcher further argued that this situation was become more worsened in 2000´s due to major  oil exporting countries as well as some emerging nations such as China had  been running large and uphilling their current account excess. In this regards,Blackburn (2008) identified that a very large balance of these current account surpluses had invested in various developed nation in all over the world that influenced demand resulted in increment prices. This system was promoted lower government bond yields as well as reduction in returns on fixed income fiscal assets with in all advance economies that was becoming a major cause of financial crisis (Alicia, 2006).

As per the study of Davidson (2008) it examined that various central banks especially US Federal Reserve had not taken proper respond to the high speed growth in credit as well as price of asset. Author further argued that management of US Federal Reserve should (aggressively) had to reduce the interest rate when  central bank identified reduction in price asset prices and influenced a very bad economic downturn.

Alicia (2006) defined that the approach of credit was supported by the notion that central bank could not get success in assessment of an asset price bubble. In such situation, an asset price bubble had become dangerous for economy and influenced financial crisis. Chong (2011) explained that central banks had followed systematic  approach to address financial cycles with the help of  government and other supervisory authorities. Author argued the assessment of cause was not easy task who was responsible for the financial crisis. In several cases, the rapid credit expansion was considered as primary cause of fiscal crisis.

Impact of financial crisis on economic growth of different country

The subprime crisis has affected economy of different countries to a great extent because it created shortage of funds and banks also become unable to provide finance to people. UK, Italy, philippines and India affected in term of employment because many people have lost their job during Subprime mortgage crisis. According to Chong (2011) It was one of the major banking crises which also have turmoil the banking system of the countries as it has laid adverse impact on the debts of the banks. The impact on the foreign debt has affected the other countries of the world and also the capital and liquidity of the banking institutions were affected. As per the Dooley & Hutchison (2009) Due the subprime crises, the currency value of many foreign countries was also affected. Another impact of this crisis was on the volatility and fluctuation on the value of the foreign currencies. Prices of the assets of the banks were declined and this also declines the financial position of many banks which are operate their business at global level.

Furthermore, subprime crisis has impact on different countries was one of the major crisis in the history of the world, it also known as mortgage mess. According to Goodhart and Lim.  (2011) This crisis has mainly affected the financial economy of the US.  It was due to the fall in the housing prices in the US and also another reason was rise in the delinquencies of the market of mortgage in US. Acharya and Merrouche (2012) According to the report of IMF, country has suffered the loss of $945 billion in the year 2008 due to this crisis. This financial crisis has not only made the impact on the banks of US but also on the banks of global level. Reason behind in this financial crisis was found that the interests rates which are charged in the prices of housing. Another reason which was assessed that the burst of housing bubble which has become the economic bubble.  Goda and Lysandrou, (2014)Previously in 2001 and 2005, there was rapid increase in the valuation of real estate market of the US. Even it has reached towards the unsustainable level. But after the year 2005 there was huge decrease in the prices of houses and it has leads to increase in the mortgage debt. After this it was also observed that the level of debt mortgage was also much higher than the value of real estate.

The real impact of the financial crisis is on the economic activities of the countries and it also leads to increase the recession in the country. There is direct relationship between the financial crisis and the recession (Davidson, 2008). Another impact of the financial crisis is on the equity value of the countries and also the output growth of the overall business. Overall impact of the financial crises in on the growth and development of the countries as the companies and economy of the nation is not in condition to perform their operations in proficient manner.

RESEARCH METHODOLOGY

Research methodology refers to the process of data collection by making use of different tools and techniques in order to making taking effective decision for business purpose. (Walliman, 2011) Research methodology consists of data analysis techniques and other imperative way to get inference from the findings. For the present research on “A cross-country analysis – causes of the recent financial crisis in different countries” following tools and techniques will be applied (Adcroft and Willis,  2008). These are explained as follows-

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Research design

It is the most important part of research methodology that facilitate to provide blue print for the study.  It assist scholar to collect data with regards to fulfilling aim and objectives of study so as to draw valid conclusion. There are several types of research design are used such as descriptive, explanatory, exploratory as well as hypothesis testing.  Under this, exploratory research is used to find the new insight in order to formulate the problem in precise manner where hypothesis testing research deigns is used in the quantitative study in order to determine relationship between two variables (Ridley,  2012). For the present research on “A cross-country analysis – causes of the recent financial crisis in different countries” descriptive research design will be used that aid to gather data without making any kind of change in the environment. Under this information will be gathered in the natural environment that aid to provide the information related to causes of recent financial crisis (Creswell, 2013). It will prove to be effective to elaborate features of situation being studied, however it does not depict causal relation. As the current study is qualitative where descriptive research design will help researcher to analyze reasons behind financial crisis in different country.

Research philosophy

The research philosophy is the imperative constituent in research because it provides base for data collection. It is helpful for development of knowledge and nature of research which facilitate to scholar to adopt appropriate perception, belief (Bak, 2011). There are mainly two types of research philosophy as positivism and interpretivism research philosophy are used. For the current research, interpretivism philosophy will be used that assist scholar to adopt subjective nature in order to collect data (Welman, Kruger and Mitchell,  2005). Furthermore, it will assist scholar to make find the real facts with regards to financial crisis that  have taken place recently and affect different countries to a great extent. It will also enables to find the specific causes behind the crisis so as to develop alternative solution for the different countries (Crowther  and Lancaster, 2012). In addition to this, observation is the effective method that will be used by the scholar in order to gather data. It will also be helpful to ensure validity  of  collected data and provide answer for formulated research questions (Saunders,  Lyon and Möllering, 2012). It will also allow researcher to collect large amount of information on the basis of observation and own choices that that aid to fulfill research objectives in an effectual manner. Moreover, in internpretivism philosophy, scholar serve as the social actor and find the relevant data accordingly (Gill  and Johnson, 2002).

Research approach

Research approach is the most significant part of research methodology wherein researcher defines path of the study. It is the most effective way to collect data in specific order so as to provide solution for prevailing research problem. Inductive and deductive are tow main research approaches are used in the research (Bell, 2004).  Here, inductive approach is used to find the root cause of the problem at first and then generalize the same in order to identify relationship between two variables. For the current study on “A cross-country analysis – causes of the recent financial crisis in different countries”  deductive approach will be used (Gibaldi,  2010). By making use of deductive approach research will be able to gather general information regarding financial crisis and then move towards its specific causes with regard to different country. Under this, specific causes will be discovered that aid to provide alternative solution for the same in order to ensure growth and development of different countries (Crowther and Lancaster, 2012). Furthermore, by the help of deductive approach researcher will focus on studies that have been done by others in order to reach at the aim of present research. It will contribute towards providing in-depth knowledge regarding different causes of financial crisis in different countries.

Data collection

Data collection is the most important part of research methodology because it serve as the base thereby scholar can be able gather data in an effectual manner. Without data collection it is not possible to draw inferences and reach at the aim of the study because data serve as the evidence (Creswell, 2013). Basically two types of data are collected such as primary and secondary. Under this, primary data are used at first hand that requires extra efforts by scholars. Also, collecting the primary data is slightly lengthy process because of its processing, collection process. On the other hand secondary data are already available and research make use of the same on the basis of requirement of study (Ridley,  2012). For the present research on “A cross-country analysis – causes of the recent financial crisis in different countries”, secondary data will be used. It is because study is based on financial causes of financial crisis that can be better known from the already available data. It will be effective to access large amount of information with regards to different counties. Also, it will not be possible to collect primary data because it becomes it very hard to approach different country. Therefore, by making use of secondary data, research  will be able to collect enough data that aid to fulfill research objectives.

Data analysis

Data analysis the crucial part because no study can be completed without data analysis. It is essential to analyze collected data in order to provide answer for research questions that are formulated as above (Adcroft and Willis,  2008). Basically two types of techniques such as qualitative and quantitative are used in order to analyze the collected data. Under this, quantitative data analysis technique consists of statistical tools such as correlation, regression in order to find the relationship between two variables. For the present research on “A cross-country analysis – causes of the recent financial crisis in different countries” , thematic analysis of qualitative technique will be used. By making of use thematic analysis, scholar will be able to analyze collected secondary data on the basis of preparing themes (Creswell, 2013). Furthermore, On the basis of themes, overall data will be  interpreted and analyzed by keeping into mind research objectives of the study. It will prove to be effective to drawing valid inference and provide alternative solution for the developed or developing counties that are suffering from financial crisis. In addition to this, thematic analysis will assist researchers to provide suggestion in context of measures to be taken in order to avoid effect of financial crisis (Walliman, 2011).

Time table

The time table refers to time frame of proposed study in order to complete the research on right time. It will be shown with the help of Gantt chart that facilitate to provide detail information regarding time taken by each activity of study. For the present study on “A cross-country analysis – causes of the recent financial crisis in different countries”, time table will be as follows. From this, information it can estimated that research proposal will take 2 week whereas development of research questions will take merely one week. Furthermore, it will take four week to gather data from secondary sources. In addition to this, data analysis will also take four weeks in order to draw valid conclusion for the study that aid to reach at the aim of the same in an effectual manner (Adcroft and Willis,  2008). Moreover, conclusion writing, providing recommendations and submission will take one week for each that aid to ensure successful completion of study withing specified time span.

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Expected results

Expected results of the present research is based on discovery of reasons behind financial crisis that affect economic growth of different countries to a great extent. It has been expected that monetary and fiscal policies that are imposed by government of country plays important role for financial crisis. It facilitate to identify impact on economic growth in term of industrial development, employment and increase in the growth of different countries.

References

  • Acharya, V. V. and Merrouche, O., 2012. Precautionary hoarding of liquidity and interbank markets: Evidence from the subprime crisis. Review of Finance.
  • Adcroft, A., Willis, R., 2008. A snapshot of strategy research 2002-2006. Journal of Management History.
  • Alicia, H., 2006. Market Research: Through the looking glass. Marketing Week.
  • Barangayrp, R. P., 2008. The Global Financial Crisis and its Implications for Workers of the World. RSS.
  • Beiske, B., 2003. Research methods: Uses and Limitations of questionnaires, interviews and case studies. GRIN Verlag.
  • Blackburn, R., 2008. The subprime crisis New left review.
  • Chari, V and  Kehoe P., 2004. Financial crises as herds: overturning the critiques'. Journal of Economic Theory.
  • Chong, C.Y., 2011. Effect of Subprime Crisis on U.S. Stock Market Return and Volatility.
  • Creswell, J. W., 2013. Qualitative, Quantitative, and Mixed Methods Approaches. 4th ed. SAGE Publications, Inc.
  • Crowther, D. and Lancaster, G., 2012. Research Methods. 2nd ed. Routledge.
  • Demyanyk, Y., 2009. Understanding the Subprime Mortgage Crisis. The Review of Financial Studies.
  • Gerardi and et.al., 2007. Subprime Outcomes: Risky Mortgages, Homeownership Experiences, and Foreclosures. Federal Reserve Bank of Boston Working Paper.
  • Gibaldi, J., 2010. Handbook of Writers of Research Papers. 7th ed. Modern Language Association of India.
  • Gill, J., and Johnson, P., 2002. Research Methods for Managers. 3rd ed. London: SAGE Publications Ltd.
  • Goda, T. and Lysandrou, P., 2014. The contribution of wealth concentration to the subprime crisis: a quantitative estimation. Cambridge Journal of Economics.
  • Goodhart, C.A.E., and W. B. Lim., 2011.  Interest Rate Forecasts: A Pathology. International Journal of Central Banking.
  • Kregel, J. A., 2008. Changes in the US financial system and the subprime crisis.
  • Naija Lo Wa, 2009. CBN’s Take On The Impact Of The Global Financial Crisis On The Nigerian Economy.
 
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