1. Discuss the relationship between the capital base of banks and the 2007-
2010 global financial crisis. Using your own research, cite at least two
examples of real world financial institutions.
The financial crisis of 2007-2010 helped in highlighting the main role of stabilizing financial intermediaries in order to buttress the smooth flow of credit to borrower’s transmission.
Most European Economists would accept that the crisis of 2007-2010 was the worst crisis of global finances after the Great Depression. In both these events, the bank’s capital base was compromised severely. Hence, the regulations of banks are required for improving the bank’s capital base quality for becoming highly resilient during the crisis of economies (Brunnermeier, et al., 2009).
Main bank failures were a result of crashing stock markets. The failures however were initiated as loans by the debtors were defaulted and deposits en masse were withdrew by the depositors. Debt that was outstanding enhanced as the costs and income of individuals in the economy started to fall. Failures of banks enhanced, as the capital borrowers did not have any payment to give to the bank.
Additionally, slowing of capital investment started to take place making the banks struggle for building their fewer loans capital reserves. Most individuals may even state that the Federal reserve system helped in shrinking the money supply in order to transform a general recession into a period of Grand Depression through emergency restriction on lending leading in turn towards bank failures.
The Federal Reserve could give no reaction because according to the Act of Federal Reserve, which prohibited the system as it, needed 40 precent of gold backup for the issued notes of Federal reserves. However in the crisis of 2007-2010, it was evident that the banks did not maintain high quality capital basis and they failed considerably before the crisis happened (Brunnermeier, et al., 2009)....