The impact of the current financial crisis on banks in the USA Essay

The impact of the current financial crisis on banks in the USA

Introduction

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Financial crisis has been an issue with long history. The current financial crisis being experienced in the global is not non-preceded one. However, the implications of the previous financial crisis experience are much less comparable to the current situations. Every time there is financial struggle, many organizations, industries and individual programs as well budgets are turned round. The government ands other running administrative bodies always are compelled to make strategic operation to counteract with such unwelcoming environment. The successes of opinion programs set are much challenged by the integration of numerous factors which determines whether the program adapted is the best solution to the situation.  (NPR, 2008)

Banking industry plays the most important role in a community. The success of any community with established economic base depends mostly in the management of its finance. As usual, banking industry is held responsible in the contribution to the nation’s economic growth. The soundness of the services and the products based in the banking industry has close relations to health economy. Bank is heart of a nation. While the heart maintains the optimum flow of blood in the human body, sound banks maintains the optimum flow of money in a nation. In a broad dimension, banks maintain and regulate the currency flow in the world. As far as the current situation stance, there is much more difficulties than many nations are going through. The situations are associated with financial crisis. The world economic graph is portraying a declining phenomenon. The impacts which the nations are going through have created much debate and concern in the global world. Some arguments are accusing the banking systems as the cause of the turmoil that is being experienced. Other arguments have directed the problem of the financial crisis on environmental changes that have lead to low world productivity. Even more heated resources have portrayed this problem to the political arena. The facts remains that the world today is crying foul over the financial crisis which has impacted the various nations, organization thus resulting to global crisis. (Factcheck org. 2008)

Statement

 The world nations are now describing the current financial crisis as the utmost of all financials crisis which have ever occurred on earth. The financial crisis signals were sent from early times of the previous years.  The indicators of the financial crisis were perceived by great leaders in the various organizations in the world operations. One of the perceiving organization predicted the world financial turmoil was the world financial market. It expressed its concern and panic a year ago before the governments around the world intervened. The first signal on their prediction was basically based on the usual business performances and behavior. By the end of the last year, to them was vivid that the share market prices had drastically gone down. Being aware on the effects that the bank sector bears, the practices were not quite amicable and suspicion over the inflation was then hiked. The costs of individual and corporate as well as the bank borrowing were seen to have been risen in a substantial manner, making the financial markets volatile to immeasurable heights.  (Factcheck org. 2008)

While the other sectors of the globes points its figure on the financial institutions over the current financial crisis, the financial institutions are also facing several consequences as result of crisis. This implies that finances are all crucial in all sectors for the prosperity of the world’s economy. The handling of the financials crisis is thus an issue which cannot be directed just to a specific sector. However, paramount advance measures are important in most crucial sectors like the sector of banking. Following strategic niche that banks occupies in the control of finances not only in the united states but in the global environments, the papers is directed to the research and investigation on how banks have the various contributions attributed to the financial crisis. However, the overall  work is would be able to focus mostly on the implication of the current financial crisis on the sector, with the intentions of making the way to drawing possible solution that the sector can take to correct and even prevent future crisis from occurring. (NPR, 2008)

Ways in which USA banks contribute to financials crisis

For along time, banks haves been blamed over the manner in which they are management and regulated. Their operations have led them to be closely associated with the financials crisis i.e. environments in which some of the financial institutions/assets lose a considerable part of their value. The financial crisis associations with the banks date back from the 19th century. However, the   early 20th century, the association of the two situations became more pronounced. Over the years, there has been not certainty on the true association of the financial crisis with the banking sector as the major contributor. This is blurred by facts that such financial crises have often been in coincidence with the recessions, stock market crashes, bursting of numerous financial bubbles, currency crisis and more so the sovereign bond defaults. But this does not render the banks immune to the issue. (Factcheck org. 2008)

 The following are viewed as the main areas in which the banking sector in the USA has contributed to the current financial crisis: – Excessive lending- excessive lending has been viewed as a major cause of financial crisis since the end of Second World War. In the recent information sources, the lend rates have not been different from those which happened after the World War II. However, the major differences of the lending of that time were much based on the local borrowers. Two to three years back before the emerging of the current financial crisis, it was repeated seen that banks had huge outflow loans to the local borrowers. The consequences of this are widely supported by the works which was accomplished three decades back by Hulbert. He observed from such incidence on which vast lending of finances resulted to financial crisis. This was as result as too much lending to the third world countries in 1983. Furthermore, with the collaboration with other countries, they were to disburse lumps of dollars to the international monetary funds. As the financial crisis begins with the thirds world countries/developing countries, they turn to developed countries and the international organizations for solutions. However, the excessive foreign lending as well the local borrowing in a given country makes increased influx of money to be in circulation. This makes the currency to lose value thus making it possible for assets’ value to be substantially lost. The perceptions that the government was supportive to the banking system, many banks were reported to lend loan to individuals with the hope of bailout. This forms a revolution which plays a vital role in the lending rate and frequency by the banks. (Thomas, 2008)

Sublime lending- this is one the lending systems which entail the extension of loans to individuals/ borrowers with perceived high risks of default. The previous year of 2007, the financial institutions indulge in lending practices which could be classified as supreme lending loans. Score of borrowers who got loans from the banks during this period are considered not to have met the credited worthiness. Thus, most of lending that were put in practice was in no doubt a bank intention. Most commercial banks got into predatory practices rather than fair loan extension practices. Score of such subprime lending was associated to the deliberate lending to borrowers who had little or no single knowledge on the loan terms and use. Furthermore, the fact that the banks delberat4elyd extended their loans services to individual who did have the potential ability to repay the interest in the long end. Following concealing of essentials loans information to the clients, and increased the loan fees to unreasonable state, this compromised the lending regulation and the financial control sectors. However, many banks do not agree to the contrary operations to the lending standards. This has continued to expand its operations leading to even greater number of people obtaining finances before satisfying the requirements of loans. Mortgage loans, auto loans ands credit cards are just but a few example of major contribution of this lending practice. Due to the expanded extend on the borrowing and subprime lending; this has consequently affected the financial markets and the other operation sectors. (Thomas, 2008)

Effects on banks

The financials crisis has numerous impacts on the banks in the United States. Most of these impacts are on the negative side of their operation. Since the gradually creeping of the financial crisis, several actions have been taken place that has affected the banks. When the financial crisis is experienced in the states, enormous effects that adversely affect the performance of the banks are common. Since financial crisis creates a lot of panic in the bank depositors, this makes the bank accounts owners to act in saving their deposited earnings.  Depositor would have a rush to withdrawal their money deposited   from the banks. Such actions of money withdrawal are not only detrimental to the bank stakeholders, but also affect the borrowers who are bank account operators. Such cash withdrawals render the bank into serious operation. For instances, huge deposits withdrawals causes the banks to be pronounced bankrupt. A situation which make difficult for new clients to entered into their operations. This occurs commonly within prolonged situation of withdrawal without immediate depositing. As result of a bank attaining the level of bankruptcy, the bank is then ultimately closed down. This cause of excessive withdrawal was first experienced in the US in 1931 when the bank of United States collapsed. Similar cases occurred in the previous year when the northern rock in Europe fall a victim. This year, bear Stearns investment bank was still another financial institution that collapsed. (NPR, 2008)

The facts that there is financial crisis, many banks are depleted of the cash that is deposited. The low level of finances disturbs the financial stability of the banks making the banks to have low tendency on the lending section. Although the demands fro loans may escalate with the difficult high priced products in the state, the banks remain incapable of offering such services. The low rates on lending by the banks by individuals not affects the returns on loans interests, but this also affects the ability to render better services to its clients, employers and the general public. The expansion of the banking industries are put at halt. (Goldstein & Kevin 2008)

 Due to financial crisis, aggregated effects are retrieved from the operation of the banks. As long as the banking industry is running its activities, perhaps there is the possibility of lending its finance to borrowers. However, the defaults of payment of the loans are not unrecorded issues. As result of this default to loan payments, the banks loses enormous amounts to borrowers who cannot afford to repay the loans. The loan defaults are both from local borrowers as well as those which are lend to foreign developing countries. While most of the loans of the local borrowers may be compensated through loan insurance companies, foreign loans mostly remain unpaid as   result of prolonged critical operation in the developing countries. The banks rescue to those banks which are affected in this particular manner remains under difficulties until the intervention by the government. The government mostly issue bailout that revives their functioning activities. (NPR, 2008)

Prevention measures

The effects of financial crisis are considered to be detrimental in the overall working of the banking industry. This calls for stern measures for control and correction of similar consequence. Like any other sector, both individual and collective control measures may be adopted. Owing to the whole system operations, the various levels of control measures bears its own advantage but the collective measures perhaps would affects some of these financial institutions negatively. One of the most important measures that can be adopted both by individual and collective bank controls is the practice of taking deposits from individual without susceptible information which can spark bank runs. Secondly, temporally suspensions of withdrawal as lending are also viable ways of observing the way cash flows out of the banking systems. (Thomas, 2008)

 But with the right requirement of maintaining good rapture and reputation both with the public and the clients, enactment   of bank regulation that provides terms and conditions of minimum ratios of account maintenance would be most appropriate. On higher level of maintaining the industry at operation, collection actions which are related to moral hazards works for the bank benefits. Often the common operations that are taken by the collective control are based on the shoulders of the central banks. The operation through the central bank as the last resort to the other banks enables it to regulate the liquidity of money in circulation. In addition to having central operation, many banks are saved with the introduction of deposit insurances. This system makes depositors to develop trust with the banks and even though there might be some doubts, the client’s attitude to deposit is enhanced by the protection of bank failure. (Goldstein & Kevin 2008)

Conclusions

Banks are important institutions that affect wide number of other institutions and sectors within the states. The effects of financial crisis have broadly being linked with several sectors that contributes to the economy of the states as well as those of the global economy. Banks are viewed by many people as the main cause of the financials crisis, however, financial crisis is a sophisticated problem brought in uncontrollable difficulties in one state and replicated to others. The current financial crisis was first signaled from the failure or collapsing   of certain major global institutions like poor performance of the global financial market. However, in US, this was indicated by the closing down of industrial organizations and the financial institutions.

The impact of financial crisis on the United States banks is that drastic withdrawal are frequent rendering the banks to operate under constraint environment. Long term result of this is the collapsing of the institution. The best solutions which have been adapted are the operation of the central bank as well as the insurance system.

Reference:

NPR, (2008): This American life episode transcript: Retrieved from http://www.thislife.org on 4th December 2008

Factcheck org. (2008): who caused the economic crisis? Retrieved from

            http://www.factcheck.org on 4th December 2008

Thomas, M (2008): Financial intermediation and the financial crisis: 4th December 2008

            http://economistsview.typepad.com on 2nd December 2008

Goldstein, D. & Kevin G. (2008): Private sector loans, not Fannie or Freddie, triggered crisis: McClatchy Retrieved from http://www.mcclatchydc.com 1st December 2008