GLOBAL FINANCIAL CRISIS

Assignment

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Response to Task 1

1.1 Global Financial Crisis

During the mid-2007, US Financial market began to experience the nastiest financial crunch after the
great financial disaster of the 1930’s (Thakor 2015, p.156). The domino outcome of numerous events
and occurrences primarily caused a general depression in the USA then later scattering
internationally. It started as a crunch in the subprime mortgage market of the US, and advanced into a
full-scale global banking disaster with the downfall of the investment bank Lehman Brothers on 15th
of September 2008. Unnecessary venturesome by banks such as Lehman Brothers facilitated to
extend the financial effect worldwide. Enormous bailouts of financial establishments and other
soothing fiscal and economic dogmas were applied to avoid a potential downfall of the global
financial system.

1.2 Causes

To examine the chief causes for the collapse of the financial section occasioning in a global downturn
and financial crisis one have to look back into US olden times. A complex mix of government policy,
financial market structure and the development of the real estate market in the USA were only a few
of the main forces to collapse the financial sector.

1.2.1 The past – US government strategy

Afterwards the Second World War, the US government was concerned to rebuild the national
economy as well as the formation of new housing estates (Parkinson 2006). In 1992, the US
government introduced a new loaning policy to escalate the home rights proportion of lower-income
Americans (Matthews, Driver 2016). Old guaranteeing criterions like down payment were made
tranquil and an additional market for subprime mortgages was formed. The Federal Reserve, dropped
interest tariffs to 1% from 2001-2004 to once more empower the dream of home rights for lower
income residents and to generate fresh jobs during the depression of 2001. What tailed was an
ultimate modification in the housing arcade. Due to small interest rate, the call for the mortgage
finances amplified profoundly as more and more residents saw their opportunity to possess a house.
At this time costs for houses started rising. US Banks and other financiers saw their opportunity to
gain cash in the housing bazaar. As interest rates were very small, it was stress-free and lucrative for
 Banks to borrow money at 1% to make mortgages. These finances are seen to be the starters for the
financial collapse (Duca 2013).

1.2.2 No Regulation

In 2000, US government decided to deregulate derivatives. Consequently, the investment banks were
stimulated to hunt for new financial merchandises (Thakor 2015). Grounded on decreased ruling the
financial market was allowed to cultivate commercial products with speculative charisma and
hazardousness. US banks began selling mortgage-assisted securities to investment banks to trade
them again to other financiers. Hence, a new financial derivative called collateralized debt obligation
(CDO) was created having relaxant regulations.

1.3 Consequences

1.3.1 The Crisis in Investment Banking system

In 2006, when the US housing market began collapsing and prices fell extremely, people started
selling their homes and almost 6 million homes were closed till 2010. In addition, the construction
industry and the real property segment began facing hardships, as the demand vanished after the
bubble ended. Hence, the subprime mortgage crunch became a financial crisis (Ferguson 2012).

The credit markets responded vastly on the continuing housing market depression. Huge losses were
recorded as more and more CDO’s went unsuccessful. In 2008, Federal Reserve took over two
gigantic mortgage banks, Fannie Mae and Freddy Mac due to illiquidity. First Bear Stearns was
attained by J.P Morgan later Lehmann Brothers ran out of money to attend their clienteles and
funneled for insolvency. Similarly, the government took over AIG, the world’s major insurance firm
as they finished enormous losses with credit defaulting swaps. The entire banking industry was now
affected and insecurity around the credit and stock market caused even more problems.

1.3.2 Global recession

Following the American recession, in late 2008, several European holdings and banking corporations had
to close and banks in Germany were saved by the government as they also invested heavily in American
estate securities (Hodson 2009). Similarly, export collapse in US also affected traders from China and
Japan. Only in China, over 10 million asylum seeker employees lost their occupations (Ferguson 2012).

2. Response to Task 2

2.1 The Financial Regulatory changes in Australia and China

Australia did not observe a big economic recession or a financial crunch during the GFC. However,
the speed of economic development did slow suggestively, the joblessness rate rose severely and
there was an age of amplified insecurity (RBA 2017). Australia’s economic system was properly
controlled and well managed in the lead-up to the disaster, and the fundamental power of the system
was supported at a key time by both the RBA and the Government. On other hand, Chinese economy
also experienced reduced impacts of GFC as Chinese institutions has little exposure the defected
financial instruments, however, Chinese leadership acknowledged the significance of taking essential
actions against global financial downturn. In September 2008, the People’s Bank of China (PBC)
instantly released its constricted monetary policy to surge liquidness (Miao Han 2012).

2.1.1 Monetary Policies

The Reserve Bank of Australia relieved monetary plan expressively in reaction to the global
downturn. The official cash proportion dropped from 7.25 percent to 3 percent from September 2008
until April 2009. A decrease of 425 base points in the formal cash rate streamed to loaning rates.

With most families and business mortgages in Australia, being moveable, monetary policy was
quickly decoded to a change in domestic disposable revenue. In disparity, most radical economies
were having already low interest rates at the beginning of the global depression, parting much less
room for monetary policy to react.
The impression of the shrill simplification of monetary policy is hard to be measured. Previous
investigation commenced by the RBA by Gruen, Romalis and Chandra (1997), offers some
comprehensive direction as to its expected effect during the recession. Minimal bank loaning interest
rates chop down by about 3.3 percent and real rates cut down by 2½ since September 2008 to April
2009. The RBA study proposes that a decrease of this scale would increase about 0.85 percentage
points to GDP progression in the initial year. The outcome could have been better than this, as
domestic debt points were suggestively greater in 2008-09 than over the era enclosed by the
observation.

In January 2007, the Chinese central bank raised the required reserve ratio; the shares of deposits,
which banks must, had to place with central bank. It had reduced the funds available to banks for
loaning purposes. To further reduce the amount of credits flowing to economy, Chinese central bank
had increased the benchmark interest rates that lead the bank’s loaning rates (Mao lijun & wang Bo
2010). Monetary policies introduced in 2007, also included property sector, which was considered
undergoing a boom by external observers at that time. In September 2007, central bank increased the
down payment up to 40% for the people purchasing multiple properties, while ratio for owner
occupied property mortgages was left at either 20 % or 30% (People’s Bank of China & China
Banking Regulatory Commission 2008). The central bank at that time on non-owner occupied
mortgage properties, increased interest rate by 10% over the central bank benchmark rate (China
Banking Society 2008).

Until the start of 2008, restrictive monetary policy proved successful in lowering the boom in real
estate sector, the speed of property sales slowed down quickly and price appreciations were controlled
substantially. Initially Chinese authorities welcomed the lower speed of property sales and lower
economic growth. However, in September 2008 when Global Financial Crisis began to get serious,
the authorities took 180-degree turn and launched a policy of monetary easing. The objective behind
this turn was to compensate the additional drag on china’s economic growth caused by quick
slowdown in global trade. While anticipating Global Financial crisis, People’s Bank of China also
initiated a relaxing monetary policy in September 2008. Few weeks later, China’s cabinet rolled out a
RMB 4 Trillion stimulus grant to ramp up expenses on affordable housing, rural and other
infrastructure. The program was subject to immediate effect spending RMB 100 Billion from
September 2008 with the remaining balance to be spent in next two years. However, china’s
leadership was extensively concerned about slowing exports due to recession as since 2007
authorities had implemented strict measures to slow down the country’s excessively increasing
domestic economic growth. China’s stimulus package comprised of policies to loosen control on
banks so they can loan more money. Government had reduced share of deposits that previously banks
had to submit with central bank. The PRC administration eliminated lending proportions and abridged
interest rates so that banks were capable to lend to firms and homeowners. After these measures, it
was in economic interest of banks to increase financing to their customers. Some of the finances were
extended to public-sector enterprises that export merchandises and services. China’s banks had
reacted almost instantly by loaning to business enterprises and homeowners. This supply of loanable
money reduced the impacts of Global Financial Crisis on Chinese economy (Lardy 2009).

3. Response to Task 3

3.1 Recent Financial Misconducts

Financial scandals in Australia began to appear since May 2014 when a documentary channel ABC
TV Four Corners in collaboration with Fairfax Journalists highlighted sales driven culture in
Commonwealth Bank’s (CBA) monetary planning subdivision (Ferguson 2014). The misconduct that
caused several customers to lose millions of dollars was investigated by a senate committee, which
recommended formation of a royal commission into fraud scandal. The committee informed on the
progress of the Australian Securities and Investments Commission (ASIC) (McGrath, Pat & Janda,
Michael 2014). Numerous days after, CBA C.E.O. Ian Narev expressed regret wholeheartedly to
clienteles who lost cash in the bank's monetary planning dishonor. The CBA was then caught in other
stuffs comprising money laundering for drug associations, ignoring terrorism funding, overlooking
legislative reporting duties for over three years on beyond 750,000 bank accounts (Verrender 2017),
and indecency in foreign exchange transactions (Frost and Eyers 2016).

Similarly, the National Australia Bank (NAB) was involved throughout 2015 in a succession of
dishonors regarding financial managers where it was exposed that the NAB silently paid millions of
dollars in return to hundreds of customers for what it deliberated was unsuitable financial forecasting
information by its workforce flanked by 2009 and 2015. An informer stated that there was an
unstable, deadly and deceitful culture within NAB (Ferguson et al, 2015; Danckert 2016). ASIC
proscribed NAB team who were formerly approved to deliver financial guidance (Australian
Securities and Investments Commission 2016). Later, it was exposed that NAB was also connected
in bad behavior in foreign exchange transactions (Frost and Eyers 2016).

Westpac was tangled in assertions that it engineered one of Australia's crucial interest rates, the bank
bill swap rate (Danckert 2017a, 2017b). It was prosecuted under liable lending regulations for overriding
an automatic procedure to select whether peoples' house financing requests met lending criteria
(Janda 2017; Long 2017). Additionally, a Westpac investment banker was caged for deceitfully
loaning millions of dollars to senior retirees (Jackson 2017). Succeeding ASIC inquiries, Westpac
was coached to make an endowment of $3 million to Economic Literacy Australia. ASIC also
originated that the bank's staffs unveiled private particulars of their customers' instructions to other
foreign exchange brokers (Uribe et al, 2017). Westpac reimbursed $65 million to 220,000 consumers
after it remained unsuccessful to provide welfares they should have expected under agreement
covenants, containing home finances, credit cards and contract accounts, offered by the bank (Yeates
2017).

Macquarie Bank was involved in the foreign exchange dealing dishonor and was coached to
contribute $2 million to donations. It was also instructed to open its foreign exchange wing to
inspection after ASIC exposed a sequence of ruptures by its dealers (Wilkins 2017). While being at
hearing in front of the House of Representatives Standing Committee on Finances, C.E.Os of the
ANZ, CBA, NAB, and Westpac guided that, regardless of customer grievances, very little high-
ranking bank workers were terminated due to wrong doing; in spite of overseeing more low-ranking
workers who had been terminated (Eyers 2016; Riordan 2016).

In a 2016 discourse in front of the National Press Club, opposition lead Bill Shorten of labor party
drawn his ideas for a royal commission into the banking segment (Coorey 2016). In the intervening
time, Liberals Warren Entsch MP also reinforced pleas for a royal commission; along with CBA
informer, Jeff Morris, who, for eight years, noted the sector's general misconduct (Vickery 2016).

At the end of 2017, as a hostile response against the authorization of same sex wedding, the Nationals
vowed to present a reserved member's bill asking for a commission of investigation into the banking
Industry. It was stated that the bill would be supported by the Nationals, Labor and other allied
parties. Nationals Representative Barry O'Sullivan and LNP MPs George Christensen in cooperation
with the Greens, Labor and other allied parties, had sufficient figures to compel the Turnbull
government's opposition to a royal commission (Henderson et al, 2016).

With party-political pressure, swelling, on 30 November 2017 Turnbull and his financial officer,
Scott Morrison, declared strategies for a royal commission.

Finally, the Royal Commission into Misbehavior in the Banking Business was founded following the
Royal Commissions Act 1902 to question into and highlight on wrongdoings in the banking industry.

3.2 Powers and Functions of The Royal Commission in Baking Industry

On 1 December 2017, Turnbull pronounced the nomination of Justice Kenneth Hayne as the only
representative for the royal commission; his post was named as commissioner (Gribbin 2017). The
representative Mr. Hayne afterwards declared that he would seek assistance from the authorized
counsel including Rowena Orr, Michael Hodge, Albert Dinelli, Eloise Dias, and Mark Costello.

Royal Commissions in Australia employed in pursuit of the Royal Commissions Act or else, have
authorities to issue subpoenas to an individual or a group of individuals to present themselves before
the Commission. This appearance is amid to provide proof or to give official papers detailed in the
summons. Sometimes it call for eyewitnesses to make a pledge or provide a confirmation; and want a
person to supply official papers to the Commission at an identified place and time (ROYAL
COMMISSIONS ACT 1902 s 2). An individual obliged with a subpoena or a notification to produce
 papers must submit with that obligation, or face trial for a wrongdoing. The punishment for verdict
upon such a wrongdoing is a monetary fine of A$1,000 or six months custody ((ROYAL
COMMISSIONS ACT 1902 s 3). A Royal Commission may approve the Australian Federal Police
department to implement search authorizations.

4. Conclusion

Global Economy was hit hard by Global recession of 2008 specially the American economy where
several banks and financial institutions went bankrupt and insolvent. This happened because of US
Government’s erroneous financial policy in real estate sector. Interest rates of mortgages were
decreased to facilitate the American dream of home ownership, however this policy proved the be
disastrous to American economy. Property prices began rising while demand started lowering which
resulted in huge losses occurred to financial institutions and the people. Australian and Chinese
economies had little impact of the GFC due to already high interest rates in real estate sector and
somewhat stricter monetary policies that were prevalent in these economies. As Part of these stricter
administrative policies, The Australian government later established Royal Commission in to
Banking Industry to investigate prevailing misconduct in this sector. This Commission has served
greatly to Australian economy by investigating various scandals that created disturbance.

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