Banking Industry Essay

2719 words - 11 pages

The banking industry has always been susceptible to economic fluctuations. The subprime mortgages crisis, that started to be felt in 2007 and is still going on, is not an exception. Although it had consequences all over the world, the main effects were seen in American financial markets, followed by the European ones. The top ten banks of the world also suffered the consequences; these can be seen in the changes occurred among these leading institutions in terms of market capitalization and also total assets. After several years of believing in free markets, capitalism and no government intervention, the whole scene has changed. During this period, the governments, acting ...view middle of the document...

Since the mid-1990’s, subprime mortgages (loans made to borrowers with more risky profiles) began to rise. Large innovations in risk pricing and technological advances facilitated credit scoring, making it easier for lenders to collect and disseminate information on the creditworthiness of prospective borrowers. The creation of a secondary mortgage market stimulated the growth of subprime mortgages: it was possible to repackage or pool these mortgages and resell them to other financial institutions as structured securities. When in 2006 the prices of houses suffered a steep decline and therefore adjustable rate mortgages rose, mortgage delinquencies augmented significantly. If the fact that the growth in real GDP declined compared to the past three years is taken into account (mainly due to the cooling of the housing market), then one can understand why the world largest economy fell into a crisis whose dimensions were not foreseen. The lost in the value of these securities backed with subprime mortgages and held by financial firms, provoked many banks and U.S. government sponsored enterprises to lose a large amount of their capital, narrowing credit around the world.
Since then, US financial markets submerged into a profound crisis that gradually reached the whole globe. Europe was one of the markets to suffer one of the greatest impacts. Other parts of the world such as Asia and Latin America did not feel the consequences to the same extent Europe and the US did. Nowadays, the economic environment is slowly stabilizing again; but there is common consensus among governments over certain topics such as having a more active role in regulating economic activity. Banks are encouraged to have a more conservative attitude towards risky borrowers and central banks are not willing to give free rein to the banking industry again. Ben Bernanke stated in one of his latest speeches: “The financial crisis has made clear that all financial institutions that are so large and interconnected that their failure could threaten the stability of the financial system and the economy must be subject to strong consolidated supervision. Promoting the safety and soundness of individual banking organizations requires the traditional skills of bank supervisors, such as expertise in examinations of risk-management practices; the Federal Reserve has developed such expertise in its long experience supervising banks of all sizes, including community banks and regional banks.” Further discussion on the consequences of the crisis on banking industry will be presented on the section Analysing the data.
Presenting the data
There are several ways of ranking the world leading banking institutions. It is possible to distinguish at least three different categories:
* Market capitalization: is the total dollar market value of all of a company's outstanding shares. It is calculated by multiplying a company's shares outstanding by the current market price of one share. It can...

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