International trade and finance law Essay Example | Topics and Well Written Essays - 2000 words

International trade and finance law - Essay Example The crisis also played an important part in the decrease of consumer wealth and poor economic activity ultimately leading to the global economic recession experienced between 2008 and 2012. Various causes of the 2008 economic crisis have been identified. These causes have been assigned weights by various economists in order to offer a comprehensive understanding of the event. According to a report presented to the U.S. senate on the financial crisis, the main causes were identified as poor regulatory systems, failure of rating agencies and high risk products among other cumulative effects2. By considering the financial crisis, we find that various questions need to be answered. First, what reasons resulted in the vulnerability of banks to problems in the credit market? What roles does the effectiveness of current international and national regulatory frameworks play on this vulnerability and finally, what changes are needed in the regulatory framework to prevented any future occurren ce of a global financial crisis. Looking at the situation preceding and following the financial crisis, we conclude that the main cause of the financial crisis included poor implementation with regards to corporate governance and risk management, poor design of regulatory frameworks and weaknesses in risk assessment and reporting. ... The main trigger of the financial crisis was the collapse of the U.S. housing bubble that begun in the late 1990s and peaked in 20073. According to Bullard (2009), the rapid demand for housing and the resulting increase in prices can be attributed to rare low interest rates, fast income growth, improvements in the mortgage market and large capital influx. During the housing bubble, there was a rapid increase in the offering of nonprime mortgage loans especially those with unusual terms. According to research, there was a 40% increase of nonprime mortgage loans between the year 2001 and 20064. Most of these loans were given to consumers with poor credit histories, marginal down payments and other deficiencies precluding them from prime loans5. The rise in subprime lending was accompanied by a fast increase in the percentage of subprime loans that lenders sold to banks. Firms such as Fannie Mae and Freddie Mac played a crucial part in the development of lending, which they funded throu gh selling of bonds in the capital markets. Ultimately, Government Sponsored Enterprises that were tasked with policing mortgage originators and maintaining underwriting standards were forced to relax these standards in order to compete with private banks6. When the bubble burst and there was a sharp fall in house prices, most borrowers realized that their loans exceeded what their houses were worth. This resulted in the inability of most borrowers to refinance their mortgages ultimately creating the motivation for defaults. Due to this, loan defaults and foreclosures increase sharply as can be seen in Figure 1 Fig 1: The U.S. Housing Bubble7 The failure of the mortgage market was also accompanied by the explosion and subsequent collapse of shadow banking.