Peak of the world financial and economic crisis in 2008-2009 appeared to be a “tough” exam for the global financial system and global market. The financial crisis began in the U.S in the summer of 2007, spreading globally afterwards. The crisis took place mostly in the US and Europe, “while the banking sectors in Japan, Brazil and China have not been significantly affected”. World financial crisis was in fact a combination of several national banking crises. The major consequence of the U.S. mortgage market crisis, that has occurred in 2007 and has spread worldwide since then, was a shortfall of liquidity. Shortly, an impact of the financial crisis was seen in Europe, with the fall of the UK “Northern Rock Bank”. Due to the connections between U.S. and European financial systems the same problem was faced by many other European banks and financial institutions.
The fall of “Lehman Brothers Holdings Inc” in September 2008 indicated the second stage of the world crisis. The stage was more intense and had more negative consequences for the financial institutions in the U.S. and Europe. The situation on the global financial market and in the national economies required intensive government interventions and regulation.
Consequences of the financial crisis
A negative impact for the global financial market since 2007 has been sustainable. “In the EU und the US, the average fiscal deficit ballooned from 1.2% to 6.6% and from 2.4% to 11.2%, respectively,” during the last three years.
Despite optimistic forecasts, neither global economy, nor financial market has fully recovered after the crisis in 2011 and 2012. Business and consumer activity remained at lower rate than before the crisis.
“Markets may have staged a strong recovery in the first few weeks of 2012 but the sustainability of that run remains in doubt, and within much of the banking industry, the mood remains much less positive” (Krugman, 2012). Currently, with government and macroeconomic pressures banking industry has been put into quite challenging environment.
In order to adapt to the changes world banks have developed “enterprise-wide and multi-dimensional change programs” aimed at implementing new operating models and attracting new investment funds. In the recession period global financial market is characterized by an increase in operational costs for the business and decrease in return on equity.
Global Market development trends
There are several trends in the global financial market that would determine the vector of its development in the nearest few years. First of all, it is a presence of various business opportunities for the banks worldwide. “Businesses that require less capital, such as wealth management and transaction banking, will continue to be attractive, but competition will become more intense”. Secondly, spending on development and implementation of new technology and innovative bank products remains a current trend. Despite that “every cost counts”, such spending can be seen as an investment for expanding and developing existing business. As an example, well known services, such as mobile banking can be mentioned.
The most significant aspects of the global market internationalization for the next few years are the following: “a) growing cross-border links between banks in the wholesale market, and b) growing relationships of banks with (non-bank) clients in other countries”.
Unlike Europe, where recession stage is quite challenging for the national economies, the rest of the world’s global markets have reached low, but sustainable growth in 2012. “This trend should continue, barring a major slowdown in China or a geopolitical shock, such as a significant rise in tensions in North Africa, the Middle East or North Korea.”. Growth stimulating measures have become the primary goal for the most national governments and central banks.
National financial and economic regulation in a recession period
Different national regulating approaches, fiscal and monetary policies, developed by governments in order to downgrade the negative consequences of crisis and recession, in some cases could be a challenge both for the banks and for the national economy as a whole. There are two main approaches to the national economic regulation: stimulus and austerity.
Current U.S. economic policy, based on the government fiscal stimulus program of 2009, being far from a “magic wand” to the national economy, shows effectiveness and slowly leads the country to recovery.
Prerequisites of the stimulus drive for the economy appeared after financial crisis of 2008 that had put national economy into a tailspin. Administration of the President’s Barak Obama had to deal with the need of economy recovery and restoring economic growth.
However, Obama’s Administration was criticized for the stimulus approach by many economists. They doubted an ability of the fiscal stimulus to stabilize and revive the economy and also warned about a potential threat of inflation because of floating the economy with budget money. Nobel Prize winner, American economist Paul Krugman, supported the stimulus approach of the President’s Obama Administration. However, he expressed the opinion that the amount of the bill should have been much bigger in order to overcome all the negative social and economic consequences of the recession period. It is obvious that the greater losses from crisis are, the more finances are needed to recover from it.
The U.S. $789 billion economic stimulus bill was spent on infrastructure investment, renewable energy and energy efficiency, advanced vehicles, and many other projects. The policy proved its effectiveness, resulting in the short-term boost and creating favorable conditions for the short and middle term investment. “In the longer term infrastructure investment can deliver positive returns to productivity”.
On the top of the world economic recession, many national governments keep up to the austerity approach in the economy. Austerity is opposite to the stimulus and presupposes decrease in public spending, aimed at reducing the budget deficit. Fiscal austerity measures have been recently implemented in a number of European countries. As a result, “Britain is in the midst of the biggest squeeze on living standards since the 1970s”.The largest unemployment rate in the European Union is in Greece and Spain, about 25% in each. Both countries suffer from the attempts to deal with government debt by austerity, suggested and introduced by Germany. However, Germany itself along with Britain, France and other countries is forced to make cuts to its national budget as well.
Despite the Western origination of the world crisis of 2008-2009 and its concentration mostly in the USA and Europe, the negative impact affected financial systems worldwide and led to the deepest economic recession since World War II.
Trends for the development of the global financial market, however, are not that pessimistic. “Western banks may continue to expand their operations in particular in Asia and South America”. International activities among banks have a tendency for the recovery during the past two years. Most likely banks would be able to maintain their foreign investments and expansions into developing markets.
“However, risks remain, mostly on the part of new regulatory measures whose combined impact is as yet hard to assess but which may strengthen the relative attractiveness of banks’ domestic markets at the expense of foreign business opportunities”. Despite the risks and due to the positive tendencies of development, banks should consider internationalization and globalization strategy.