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Global Financial Crisis of 2008

University: Regent College London

  • Unit No: 3
  • Level: Undergraduate/College
  • Pages: 6 / Words 1546
  • Paper Type: Assignment
  • Course Code: N/A
  • Downloads: 252
Question :

This sample is about:

  • Global financial crisis
  • How it's important in business
  • What affects it have on organisation
Answer :
Organization Selected : N/A

INTRODUCTION

Financial crisis refers to situation in which financial institutions are not trusted any more and process of lending stops. At the same time difficulties are faced by consumers, banks, companies etc. Global financial crisis of 2008 affected many countries including UK where bankers' bonus was blamed for that.

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MAIN BODY

Global Financial crisis occurred in 2007-08 was mainly associated with banking field as financial assets of most of investors suffers from deprivation of financial assets. Thus they started to pull out their money from banks due to fear of decrease in nominal value of assets and also started to draw back amount form savings account. Bonus scheme in UK during financial crisis reflected major changes and complexity in structure (Bruce and Skovoroda, 2013). Thus at that time actions of Government of UK towards administration of bonuses was not appropriate and there were no control measures were taken into account. For the fallout in 2008, pays and bonuses of executives in banks and financial institutions were identified as a partial cause according to reporting by official documents. Adair Turner, Chairman of Financial Services Authority (FSA) in UK claimed that improper bonus structure encouraged inappropriate behaviour and this ultimately lead to financial crisis of 2008. A study was conducted on the controversy of pay and bonus structure of executives in companies of financial services sector. This investigation shows that banks laid emphasis on incentives of executives to take unjustified risk for causing financial crisis. As compared to other sectors of economy, bonus and compensation in financial services sector was increased. This increment was done in 2006, just before financial crisis 2008 (Domitrovic, 2012). According to that study, compensation of CEO rise up by 131.78%, an increment of about 80.41% in pay of total board and 41.38% increase in compensation of employees. Average pay of financial services sector ranked second after non-cyclical service sector when comparison is done. In contrary, a research conducted by Dr Sarah Jewell, an economist claimed that although compensation and bonus in financial services sector are higher when compared to other sectors but there is no proof to blame bankers' bonuses for financial crisis 2008. Also a lack of evidence for the allegations on banks to take risks for profits for shorter duration. This study proved that there was no relationship between pay and performance of board of directors.

During global crisis of 2008, Lehman Brothers which was among the largest banks of New York lead to bankrupt. It was a biggest bankruptcy of about filing $639 billion assets and debt of about $619 billion (Grigor′ ev and Salikhov, 2009). At that time number of employees were 25000. CEO's of Lehman Brothers and Bear Stearns suffered with a loss of $1 billion at the time their firms collapsed. These losses intensified that financial crisis. Excluding this, Wall street firms suffered with losses of tens of billion dollars. Bonus system can not blamed alone for financial crisis of 2008, along with it belief in inherent safeguards adopted by government. In contrast to some of another investigations, all the companies in financial sector are not responsible for crisis, but it was because of some greedy financiers who involved in fraudulent and corruption activities. So they should be punished with penalties and revolutionary reforms should be made for their behaviour which they performed such as, inadequate risk controlling techniques, uncontrolled credit expansion, inappropriate designing of incentive scheme. Thinking from a different perspective, basic problem for financial crisis is not incompetent bankers but instead problem was that financial institutions were lending excessively to purchase real estates. Reason behind these lending were preferences of borrowers and banks. Because providing loan for buying real estates is easy for a bank as they are of tangible nature and simple in valuing. People prefer to take loan for real estate because their value does not depreciate rather it increases day by day. Thus blaming on bankers' bonus is not the resolution of problem. It is being accepted that some mistakes were there in policies, structure of financial system and in economic concepts.

Adair Turner said that blaming on banking system of UK or complexity in financial products is not right and justified. Instead it was mistake of some greedy bankers. Poor risk management, instability of banking system, improper credit structuring, are some of faults of bankers of UK (Otter & Weatherly, 2008). Cure for the global financial crisis is not to limit bankers' bonus or pay, adopting innovative risk management techniques or dividing big banks. Real way to solve this problem is making housing strategies. Taxation should be raised in proportion to rise in prices of houses and lands.

Main impact of these misconducts are on shareholders and stakeholders. As all activities of business are done before taking in view their interest but if due to these financial difficulties, banks collapses then ultimately they suffers. Impact of financial crisis on UK was higher as compared to other countries. Reason behind this is that this country does not have powerful manufacturing base and growth in past was due to enhancement in financial services, retail sales and purchasing of real estates on credit. Also in accordance with some financial reports, after complex credit situations, economy of UK depend on service industries and this resulted in lack of business investment (Anonymous, 2010). At that time, UK faced huge losses in sectors of both business as well as financial. Structure of tax in this country is such that tax liability on payers is very low. So it is not possible to increase public spendings for resolution of global crisis. From the above discussion, one can understand that blaming wholly on banker's bonus for financial crisis is not justified. There are also some another reasons responsible for it. Before this global financial crisis 2008, major and worst depression occurred in 1930.

The Financial crisis began in the mid of 2007 mainly gained the attention on the high pay levels of the employees and their bonuses in the financial sector (specially in banking and financing sector). The head of Financial Services Authority (FSA) claimed that inefficient and unfair incentive structure played a drastic role in the contribution of the financial crisis in UK. The bank bonuses had become the burning issue at that time, the public focused on the investment or 'casino' bankers, whose recklessly risk taking helped the financial system of to get out of the collapse, were still paying bonuses while the majority was suffering from the recession. The issue started with the growth of international trade, then the banks began to increase their capital bases by floating on stock market. At that time bakers were able to strike the profit sharing bargains with their new shareholders, although they were very well rewarded, especially in times of booming profits period. Thus bank bonuses were born. The main problem  started with this arrangement was that the bankers had become less interested in providing long financings from the the banks and focused on boosting their own bonus targets and after the emergence of new highly incentivised investment bankers were engaged with those banks who offered the most generous bonus pool (Ivashina and Scharfstein, 2010). The risky gambling role played by the bankers as they gambling with other people's money and leads to financial crisis, and unfair bonuses payments  continued to be made at that time even when the taxpayers bailed out the banks had enraged politicians and the public. The politicians at that time railed against the bonus payments but they were unable to curb or control them. The anger of general public over the excess salaries and unfair bonus payments was the only reason behind the founding of global occupy protest movement 2011.

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After that the regulatory response to the global banking crisis, specified the differences  between short term remuneration structures determined receiving taxpayer support and long term

remuneration structures which determined financial incentives. At the end of year 2008, the chief executive of FSA declares to the CEOs of major international  banks and societies regarding the new and different scheme of remuneration policies. In beginning of year 2009, before the end of financial year FSA published a new fair criteria of executive remuneration and bonuses. The code were instantly applied to all banks and brokerage under the major authority of FSA which includes the all small and major banks and building societies (Bankers' bonuses and the financial crisis, 2012).

The code was applied to all banks as an enforceable rule that a firm must establish,  implement and maintain the remuneration policies, procedure and practices accordance with the codes established by FSA as major authority, must be follow consistently with the aim to promote the effective risk management. According to code, the procedure used to calculate the remuneration in the risk and compliance department should be independent and calculation of bonus pool based on the earned profits.

CONCLUSION

From above discussion, it concludes that only compensation or bonus of bank executives was not responsible for financial crisis. There were also many loop holes in UK banking system lead to that crisis.&

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