Question

In Appendix 6A of your textbook the authors review the financial crisis that occurred in the late 2000s. They state: "This financial crisis had huge effects on financial institutions and the way they do business today and will do business in the future."

From the information in the appendix (and from whatever other sources you might find enlightening), discuss three major long term effects the financial crisis had on financial institutions and their ongoing operations.

Answer 1

The major impacts of the financial crisis on the financial institutions was that:-

1) The financial institutions became more regulated and the trading of complex derivative products which was difficult to understand was curtailed to a large extent.

2) Most governments followed a very liberal fiscal policy to support the economy post the financial crisis and hence this led a very high amount of public debt. The leverage in the balance sheet of the private corporations and the financial institutions was transferred to the government balance sheet.

3) Risk management in financial institutions became of paramount importance and the frameworks were revamped. The bonus and compensation structures were also revamped to ensure that excessive risk-taking is not encouraged and prudence is exercised at every step.