Noor Ul Ann Zaid

Global Financial Crisis and its impact on Australian markets Contemporary Issues and Theoretical Analysis Presented by: Click to edit Master title style Introduction • Global Financial Crisis (GFC) as the most significant downturn since the great depression. • Beginning of GFC as a housing bubble in the U.S. Increase in demand for real estate Increase in real estate prices Low mortgage rates Unprecedented access to credits in the form of mortgage • Significance of understanding the GFC in preventing future crisis and maintaining financial markets. 2 2 Click to edit Master title style Background • Housing boom of the 1990s to 2000 in the US. • Easy access to loans and rise in property prices. • Deregulation of financial markets and reliance of banks on mortgage lending. • Unsustainable economic crisis leading to the rise of GFC and financial boom. 3 3 Click to edit Master title style Key Causes of Global Financial Crisis • • • • Housing bubble burst: the rapid increase in housing prices led to Housing Bubble The housing bubble was inevitable though it burst in 2007 when most borrowers were unable to pay for the loans offered. High-risk lending: Lenders extended credit to high-risk borrowers, (subprime mortgages), with hope that home prices’ increasing would pay off the default risk. Deregulation: The liberalization of the financial markets where the regulatory measures taken were among other things aimed at preventing speculation as well as creation of risky financial instruments. Credit Default Swaps (CDS) and Mortgage-Backed Securities (MBS) led to Fragile financial systems in which risk was diversified across institutions so that the true risk was hidden. 4 4 Click to edit Master title style The Sub prime Mortgage Crisis Subprime Mortgages: Borrowers which received loans and were rejected by many other lenders due to their history of bad credit, risky mortgages often with variable interest rates which grew unbearable as the rates soared. Mortgage-Backed Securities (MBS): These unsafe loans were grouped together and converted into securities that were sold to other investors; thus, the risks were effectively shared across the global financial networks. When the property market crashed homeowners abandoned their mortgage obligations and this precipitated a chain reaction which led to the bust of MBS. 5 5 Click to edit MasterTimeline title style of Events-: Housing prices fell resulting in mortgage defaults. 60 March 2008: The downfall of investment bank known as Bear as a result of its involvement with subprime mortgages. September 2008 : The Lehman brothers got involved in insolvency October 2008: The global governments such as the United States and European nations offered rescue packages and a stimulus to avoid the continued failing out. 6 6 Click to edit Master title style The role of financial Institutions • • • High risk behavior: Financial institutions including investment banks played a dangerous role by acting irresponsibly without realizing the actual risk involved. Lack of Oversight: They gave out subprime loans, packaged them into mortgage backed securities, traded them and all these without any suitable regulation. Lehman Brothers & AIG: Some of the instances of firms being at the receiving end of these risks include Lehman Brothers, AIG among others that were brought down. 7 7 Click to edit Master title style Government response • US Government signed the Emergency Economic Stabilization Act which established the Troubled Asset Relief Program (TARP) • The Federal Reserve reduced the interest rate and pumped money into the banking sector in order to avoid a complete melt down. • International Response: Other developed countries such as those in Europe and other currencies also had to curb their banks and put more cash into their respective economies. 8 8 Click to edit Master title styleon Global Markets Impact Stock market decline: Intensive fluctuations were observed on the world stock exchanges; such indicators as Dow Jones and FTSE 100 suffered significant losses. Global Trade Contraction: The consumption and investment were globally dampened hence reducing the volume of trade to a smaller number. Recession: Most developed nations including the US, the European region, and Asia fell into a situation of recessions with the growth rates being depressed. 9 9 Click to edit Master title style Impact on Financial Institutions Bank Failures: In a single year of 2008 alone more than 25 US banks went bankrupt and many needed governmental intervention to stay afloat. Credit Squeeze whereby financial institutions withdrew their lending power – liquidity constraints ensued in many fronts. Restructuring: To this effect, a number of firms such as Merrill Lynch and Bear Stearns among others were either merged or acquired by stronger competitors so as to avert a deeper disaster. 10 10 Click to edit Master title Impact onstyle Individuals and businesses Unemployment: A large number of employees lost their jobs across the world and millions of people were left without sources of income. Foreclosures: Failure in paying loan installment to own a house, which leads to high number of foreclosure especially in the US. Businesses: Banks did not grant loans and again lack of funds affected the businesses, several shutting down, laying off employees, and reduced levels of production. 11 11 Click to edit Master title style Recovery Efforts Stimulus Packages: The governments worldwide also, especially the American government, invested their money into the economy to encourage expenditure and capital investment. Quantitative Easing: US Federal Reserve, bought financial assets in order to provide cash to the banking system. Recovery was gradual and full recovery was not initiated and there existed prolonged periods of recession. 12 12 Click to edit Master title style Long Term Effects of GFC Economic Inequality: The crisis affected the outcome in a way that increased the disparity of income between the rich and the poor. Stricter Regulations: To avoid similar pitfalls, the governments in the developed world especially the US passed the Dodd-Frank Act which compels higher levels of scrutiny of the banking and financial sectors. Risk Management: The turbulence revealed the need for assessment of risks in financial organizations 13 13 Click to edit Master title stylefor Financial Crisis Lessons Financial Oversight: The importance of adequate measures to oversee and manage dangerous financial activity was manifested by the occurrences of the GFC. Global Coordination: The crisis was characterized by interconnectivity of world markets and this proved the need for international cooperation especially in the time of such crises. Risk Management: There is need to enhance the standards of operation on the financial and risk management fronts to eradicate episodes of over leveraging and speculative bubbles. 14 14 ClickCurrent to edit Master titleinstyle Relevance Light of Australian Financial Markets • Regulatory Changes: In the wake of the events that led to this crisis Australia has since increased the measures it applies to financial activities and the frequency of its scrutiny of the same. • Market Impact: Originality: It was also found that Australian markets could also be influenced by global financial instability because the markets are interconnected. • Risk Management: Australian institution have advanced in risk management practices as well as in the disclosure practices. • Economic Policy and Resilience: Through the concept of the GFC, Australia formulates measures that may be helpful for the improvement of the economy’s stability and more so dealing with any aspect of an economic shock. 15 15 Click to edit Master title style Conclusion Causes and Impact: December 2007 to December 2008: caused by housing bubble burst, risky lending practices, financial deregulation and derivatives. Caused falls in stock markets across the world, reduction in volume of trade and recession. Long-Term Consequences: Stress on the requirements for the strengthening of the regulations and enhancement of the risk mitigation measures. It led to changes such as the passing of the ‘Dodd Frank Act ‘ and increased levels of economic polarization. Lessons for Future Crises: Main advantages of strong financial management as well as international cooperation. This research study found out that there exists a need for effective risk management practices. Current Relevance to Australia: The strengthened rules of assessment and mitigation of risks that affect business activities. Australian markets are affected dependently on the global financial instability. Some measures people have put in place towards enhancing the economic situation. 16 16 Click to edit Master title style Thank You 17