Question

1. Outline the key provisions of the latest framework, which was put forth in aftermath of the recent global financial crisis that began around 2007.

Answer 1

The global financial crisis that originated due to collapse of banking system in USA in 2007. The financial meltdown in the US economy emerged when US financial institutions disbursed huge subprime mortgages to people and housing prices continued to rise high for a short duration and then housing prices steeply fell down due to lack of demand. Many subprime mortgages never returned to banking sector resulting shortage of liquidity in the US banking system. Even intervention by Federal Reserves and Federal government in the market did not yield any satisfactory results and the great financial meltdown that begun from housing sector spread over to other sectors also by the end of 2007. The financial meltdown situation also surfaced in European Union (EU) when many borrowers defaulted the home mortgages to the banks.

The interventions of Fed and other government agencies included lowering the discount rates and key interest rates, offering more funds to banking industry and increasing public investment in different sectors. Similar financial exercises were also followed in European Union, United Kingdom( UK) and other countries of the world but that failed to stop global financial meltdown. To cope with the adverse financial situation, Federal Government in USA established an emergency fund of $700 billion under the National Stabilization Act of 2008. The emergency fund was used by Federal government to buy out sinking assets such as government securities and debt funds. This measure enabled banks in USA to clear off toxic mortgages from their balance sheet. The federal government also decided to hold on the sinking assets until there was recovery in the capital market.

The Federal government also increased the Federal Deposit Insurance Corporation (FDIC) deposit insurance to $250000 from $100000. The FDIC insurance funds enables financial institutions of USA to circulate government backed bonds of short duration in the market. The main objective of raising insurance limit was to boost investors' confidence in the capital market as rate of returns on such bond investments were guaranteed by the government. Similar financial stimulus practices were also followed in EU and other countries of the world that resulted recovery of US economy and economies of other countries of the world after 2008.