Financial crisis and banking industry

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Financial crisis and banking industry

Introduction

The U.S banking industry has severely weakened as a result of the current financial crisis. The number of banks falling is rising, as financial crisis continues, and bank stocks are plummeting. As a result of this crisis, banks are tightening their lending standards and terms to exceptional levels. The tightening experienced could be detrimental as it could derail or even undermine the recovery of the economy. Financial crisis is the period when financial assets lose a greater fraction of their nominal value. Financial crisis leads to paper wealth loss but mainly not the real economy (Cao, 2012). The essay will explain how financial crisis affects the banking industry.

The current global economic downturn and financial affected world’s economy negatively and increased uncertainty. Financial crisis may have an important and the country and may lead to inflation and cause huge risks to the environment. Ciro states that the greatest organizations affected by financial crisis are the smaller banks. Banks face risks as a result of economic growth slowdown including credit risks. Default loans are small, but are increasing, and this is expected to grow tremendously. Various signs associated with credit risks include the bankruptcies reported (2012).

Financial crisis also provides a platform for banks to tighten their loan lending. The current financial crisis has made banks tighten their loan rates by lowering the discount on huge loans and increasing the risk premium for more risky loans. The price for non- commitment loans was also significantly higher in comparison to commitment loans. Financial crisis also affects shareholder’s equity (Cao, 2012). During the current financial crisis, many banks had to reduce shareholder’s equity as a way of sustaining the business cycle. Financial crisis leads to the banking industry to assume a better risk management program.

According to Ciro, credit evaluation is an important factor in banks. The current financial crisis made it possible for banks to evaluate their credit evaluation plan critically. The evaluation plan requires banks to obtain more information regarding the borrower to reduce the risks involved (2012). Financial crisis also makes banks eliminate some loan products to new loan borrowers. Financial crisis has also proved difficult to banks due to the creation of competition. The competition is attributed to deposits made making larger banks benefit and offer huge interests. Financial crisis also brings success to commercial banks as it offers them the opportunity to claim their deposits lost to huge institutions (Cao, 2012).

Conclusion

The current financial crisis proves difficult to all institutions, regardless of their conservative strategies and their capitalization. The current crisis thus brings better news and opportunities to various banks. Banks can increase their deposits, better themselves, and even gain new customers, if they strive to serve customers without drifting away from traditional practices.

References

Cao, J. (2012). Banking regulation and the financial crisis. Abingdon, Oxon: Routledge.

Ciro, T. (2012). The global financial crisis: Triggers, responses and aftermath. Farnham, Surrey: Ashgate Pub.