International Banking Essay Example | Topics and Well Written Essays - 2000 words

International Banking - Essay Example The 2008 crisis is considerably the first crisis in the era of globalization, as caused by a number of factors which include funding liquidity, and market liquidity (Kolb, 2009, p. 10). Funding liquidity is the availability of sufficient cash in the capital deposit of a financial institution. This means that funding liquidity risks occur whenever banks cannot fund their own businesses. Market liquidity, on the other hand, takes into considerations issues to do with trade institutions which are easily able to do business within the available markets; therefore, market liquidity risk factors are the difficult situations when any market is not sufficient enough for easy trade activities (Pedersen, 2008, p. 13). The roles of Funding Liquidity and Market Liquidity in the 2008 Crisis According to Strahan Philip (2012), funding liquidity risks and market liquidity risks contributed much to the occurrence of the 2008 financial and economic downturn. Towards the end of 2007 and the beginning of 2008, the consequences of banks giving liquidity to loaners and creditors in the world’s leading economies was felt throughout the globe. The banks in the USA began lending loan liquidity to people; this led to weakening of their capital bases. It additionally exposed banks to funding liquidity risks, which eventually lead to bank runs. ... This saw the JP Morgan Chase bank running out of cash in its deposit pots. The issue of securitization is another cause of the financial crisis. American banks came into one pool in order to create a sense of security while giving out irresponsible loans. This proved dangerous since the banks gave out risky loans to many individuals who could not afford to service these loans at high interest rates as was expected of them (Pinyo, 2008, pp. 1-6). Due to runs, the banking institutions got involved into the trend of cash borrowing in order to create more securitization. As a consequence, property prices started fluctuating, thereby causing panic even in the Sub-prime mortgage market (Rhodes & Stelter, 2010, p. 32). Banks that did not have enough cash in their accounts began repossessing their high value properties such as buildings. Bigger banks, on the other hand, started to buy securities from the minor banking institutions with the intentions of saving the economic situation as had p revailed. However, this instead resulted into greater damages within the real world economy (Weisberg, 2010, p. 46). At far, all these economic turnovers resulted into funding liquidity risks and market liquidity risks within the banks themselves, hence scaring away a number of investors who then reacted by withdrawing their deposits; and thus, commodities prices fell to the extreme levels. The chart below indicates Liquidity Spiral as caused by the market and funding liquidity risks. Sources: (Pedersen, & Garlean, 2007; Pedersen, & Brunnermeier, 2008) How to measure bank funding liquidity risk and market liquidity risk There are several ways of measuring funding