The and those who suffering the costs, this

2007-08 financial crisis is the one of the highest economic recession in the
after the one called “Great depression” in the 1930s. The fear of the banking
sector caused by the credit crunch which reached its peak in the mid-2007 followed
up by the collapse of subprime mortgages and many another type of securitized
products are considered to be the most understandable global financial crisis (Talukder,

 In any economy, banks are considered to be one
of the most important players as they considerably contribute to the
development of the economy through the facilitation of business activities such
as investment by providing credit.

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Therefore the main objective
of this study is to tell the changes of banking system behavior during the
latest global financial crisis (2007-08). The first part will identify
the criticisms that were made against the banking sector during the financial, the second part also will
identify important changes in bank behavior (and in particular funding and risk
taking), and the last we will focus on which banks perform well during the
global financial crisis (Talukder, 2017).




During the global
financial crisis one of the biggest causes the crisis was deregulation in the financial industry which allowed the banks to
engage high risk investment like:

Ø  Hedge fund trading with derivatives which increase the demand of the mortgages

Ø  Securitization, such
as mortgage-backed securities.

Ø  Released Subprime mortgage

Ø  And also there is a difference between those profiting from excessive
risk-taking which are banks, and those who suffering the costs, this phenomenon
is called “The Moral Hazard”. In this part of our assignment, we will explain
how the moral hazard contributed to the global financial crisis.       

Before the beginning of
the global financial crisis, one of the examples of moral hazard that
contributes to the crisis was the financial institution’s expectation that
government will not let them fail due to the organized risk that could spread
to the rest of the economy. Through financial innovation instruments such as
Mortgage back securities (MBS), Asset back securities (ABS), Collateralized
debt obligation (CDOs), the bank got involved in a high-risk investment which
was practically so complex, fundamentally non-transparent. These instruments
were also not correctly priced, and not sold on markets and are not liquid.
According to the Securities Industry and Financial Markets Association (SIFMA),
there was $7.4 trillion worth of MBSs outstanding in the first quarter of 2008,
more than double the amount outstanding in 2001. However, talking about moral
hazard, even though banks were considered to be the ones who were taking the
advantage, but the evidence show that the banks were lost a huge amount of
money. It does not really make a whole lot of sense to have the bad Behavior by
insiders and then to have the insiders get criticized as well. And that is
exactly what we saw during the crash. Even before the collapses of Lehman
Brothers, it appears to be the case that the insiders or banks, the ones who
are supposed to be taking advantage of, and misleading these trusting
homeowners, were, in fact, themselves losing a great amount of money. Here is
just some summary statistics on losses during the crisis. You can see that the
institutions are losing multiples of billions of dollars. Citigroup losing 42.9
billion, UBS 38.2 billion, Merrill Lynch 37.1 billion. Here we see, in total,
20 institutions that lost, each one of them more than six billion dollars
during the financial crisis (Talukder, Md. Abu Hasnat and
Kamrul Islam, 2017).



In this part, we will
focus on the important changes in the bank behavior during the global financial
crisis from the perspectives of funding and risk taking. Banks use a variety
kinds of financial tools, from both retail and wholesale sources of funding.
Retail banks fund sources include primary customer deposits, mainly from
household sectors while the wholesale banks source the funds from the private
markets used in addition to customer deposits to finance the bank operations (Talukder, Md.
Abu Hasnat and Kamrul Islam, 2017).



A. Changes In Funding Behavior During Global Financial Crisis.

 After the global financial crises which affect
the worldwide the structure the banking funding behavior has changed due to many
structural advances, in which emerged as a result of changes to the supervisory
and regulatory framework. These reasons include the strong interconnection of
financial markets and banks, globalization of financial markets, quick growth
of investment banking activities in both investment banks and commercial banks
which commanded an increasing trust.

 However, the last global financial crisis
showed the dark side the wholesale funding In terms of the effect of funding
structure on bank risk, past works showed the quickly of funding amount at a fairly
at a low cost but the 2007-08 global financial crisis showed that the wholesale
financiers have low interest to conduct costly monitoring on the basis of cheap
and noisy signals As the market sources of funding deeply trusting on market
perceptions, this can initiate doubting to wholesale investors and could
further lead to the experience of Northern Rock Bank in the United Kingdom.

The bank funding has
gone through extraordinary disturbances, due to the structural changes, during
the 2007-2008 global financial crisis the banks promote for the major
adjustment in the operations and funding models.

The financial crises
that emerged in the United States and European banks resulted the important
changes in the funding process of banks and they are:

First: funding support from the governments both in
direct and indirect funding for stabilizing the funding situations of the banks.

Second: the banks reduced their interbank unsecured
liabilities and securities and provide with a steps toward using long-term
securities of general funding, especially covered bonds.

Third: the bank are limited
number of sources of financing.

Fourth: Imbalances in the
balance sheet are developed in banking crises as the increasing diversification
and complication of funding instruments.

The 2007–08 global banking crisis showed the
shortcomings of business models that depended extremely on short-term wholesale
funding, such as those adopted by Northern Rock in the United Kingdom, Bear
Stearns and Lehman Brothers in the United States (Talukder, Md.
Abu Hasnat and Kamrul Islam, 2017).


B. Change In Risk Taking Behavior During Global Financial Crises.      

As the funding behavior of banks changes during
the period of the global financial crisis, the risk taking the behavior of banks
also changed significantly. After more detailed
research we know that the most important risk of banking sector are credit risk
and insolvency risk.

The factors
that influencing banking risk are two groups which are called determent of risk:

The first
group of risk determinants includes factors which specific to each bank and
includes the capitalization, deposit insurance coverage, size, competition, and
regulatory quality.

The second group of determinants includes factors relating bank as
macroeconomic environment such as economic growth and inflation  (Talukder, Md.
Abu Hasnat and Kamrul Islam, 2017).

After the global financial crises the
risk-taking behavior of banks were limited, due to the

Ø  Improve
reserve capital.

Ø  Reducing
bank failing by the concept (too-big-to-fail).

Ø  Screening
and monitoring

Ø  Enhancements
to the “securitization model.”

Ø  Acceptance
of principles for sound compensation practices, to avoid perverse motivations
for risk-taking.

Ø  Acceptance
of principle of some types of financial transactions under U.S. Generally
Accepted Accounting Principles (GAAP) and International Financial Reporting
Standards (IFRS).

Ø  Some
OTC derivatives reforms.


The Bank productivity
and statement of financial position were significantly important factors of
performance during the crisis than the regulation and authority and also the banks
with the advanced Level and high capital are usually performed better during
the crisis.

This analysis reveals
that the important difference in the ability of banks to sustain lending
remained during the financial crisis, and this ability is determined by the
strength of their balance sheets. There are three main results in the research.

First: the heavy confidence of banks on the funding from market caused
liquidity shocks during the crisis and started reducing their supply of credit
maximum than other banks.

Second: this effect was
prepared of by bank capitalization in both the quantity and the quality of
capital mattered. The disclosed banks to shocks with a good capital held more
tangible common equity and decreased lending less as much as possible than
other disclosed banks to shocks.

Third: capital and structural
liquidity are linked with some complementarities in the higher structural
liquidity, in which there are benefits for lending only for well-capitalized

In-nutshell after more research we knew that banks with more shareholders
performed worse during the crisis. And the any bank which has,

Ø  Reserve capital requirement

Ø  Independent supervisors.

Ø  Use portfolio management (asset diversification), are performed better during the

And also found that
developing countries like China, Brazil, and India systemically recovered
quickly from the crisis by generating interest in the potential modifying role
that these banks could play during periods of financial suffering (Talukder, Md.
Abu Hasnat and Kamrul Islam, 2017).


The conclusion of this
study is to discuss the changes and tendencies of the banking sector behavior
during the last global financial crisis (2007-08). The study tells that the
behavior of banking sector had one of the primary causes of the global
financial crisis. The study also shown that the banking sector had gone through
trends of changing behavior, and also the study identifies some the criticisms
of banking sector since the start of the crisis.

Moreover, the study has
identified that banks practice a different behavior in terms of funding and
risk taking during the 2007-08 global financial crisis. In terms of bank
funding, banking crises increased as banks’ over confidence on a limited number
of sources of financing. Banks were only doing to source the fund from the
wholesale trading. This brings imbalance in the balance sheet of the banks. In
other words, banks were doing long term investments with short term sources of
funds which create liquidity risks.

The study also
identified that oddness between the short-term funding and long-term funds had
built up more liquidity risks. This brings that banks change their risk-taking
behavior and invest high-risk investments to gain a higher return as a result
of low-interest rates. Finally, the study looked the bank behavior and found
that well-capitalized banks may react less to profit shocks and their profits
could be less sensitive to the business fluctuations, as their portfolio
decisions may vary from those taken by less promoted banks (Islam, 2017).



Islam, M. A. (2017). The role of banking sector
during global finacial crises (2007-2008). International Journal of
Scientific and Research Publications, 6.
Talukder, M. A. (2017). The Role
Banking Sector During Global Financial Crisis. International Journal of
Scientific and Research Publications, 4.
Talukder, M. A. (2017). The role of
bankinf sector during global financial crisis . Iternational Scientific ,
Talukder, M. A. (2017). The role of
banking sector during global financial crises in 2007-2008. International
Journal of Scientific Research Publication , 1.
Talukder, Md. Abu Hasnat and Kamrul
Islam. (2017). The role of banking sector during the global financial crises
in 2007-2008. International Journal Scientific and Research Publications,







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