Whenever
we face a financial crisis, the main question on everyone’s mind is to
determine what or who is the cause of this situation. Security? Deregulation?
Greed? One can say that it is not just one aspect that leads to such a crisis
but a combination of many factors.
Some
of the reasons might be evident while others are not visible to the naked eye.
It
is difficult to determine the root cause without knowing all the intricacies of
a situation. Mentioned below is a list of possible clauses, which can collectively
be a major cause of financial crisis.
#1-Leverage
Excessive
leverage is a key factor behind a financial crisis. Leverage travels far beyond
the balance sheets. Leverage is inserted in off-balance instruments like derivates, structured securities, etc. As a
matter of fact there is no clear and transparent accounting for leverage.
This
means it becomes difficult to restrict and manage the skill of legislators. One
effective solution is to evaluate and accept consequences which probably are
less harmful than the previous financial crisis. You can also implement higher
capital needs for the same.
Instead
industry should be permitted to adopt a transparent pattern which is much more
efficient and effective.
#2-Liquidity
Liquidity
equates to lending long and borrowing short. There was a severe need to
restrict this mismatch in liquidity. There are institutions which mis-lead
investors about their true liquidity and reap benefits from this. It is
difficult to understand such accounting gimmicks.
#3-Clash of interest
You
will hardly find any profession with such a large number of conflicts of
interest. For instance, the asset management industry is also amazed with the
‘old school’ approach of bankers. This has compelled the financial industry to
switch to a business approach which is customer friendly. It is crucial for
bankers to understand the demands of their customers and thereupon offer
services.
#4-Taxes and subsidies
The
tax policy of a country has a significant effect on cash flow of capital. There
are certain tax codes which are required to be refurbished for better financial
effect. For instance, implementation of financial transaction
tax
results helps you to put off short-term speculation while also providing long
term investment benefits.
Our
society is rather in need of more progressive capital gain tax which boosts
real long term investment speculation. It is essential to make sure that the
subsidy is recycled back into the economy instead of it being used as
speculation.
It
is wise to eliminate subsidy on debt according to the financial situation. For
example, you can encourage more debts when you have excess money in the market.
#5-Governance
You
must be acquainted with the fact that the financial system has out grown
traditional parameters and is interlinked to an extent, such that it affects
almost all citizens. When it comes to the common man governance plays an
integral role in determining the extent to which they are affected.
#6-Too huge to fail
The
current market condition tells us that the industry comprises of firms of a
complex nature.
A
theoretical approach assesses different scales of economies which diverts you
from the main issue. The truth is that efficiency improves at different scales
but it still lacks optimal effectiveness.
Every
industry needs equilibrium of efficiency and resiliency to survive and one
needs to understand this fact. Diversity, decentralisation and maintenance are
secret ingredients in order to improve resiliency.
#7-Fraud
The
truth is that even when financial institutions commit fraud they are too big to
penalise and are often subject of Government grants in their recovery.
The
best example can be the recent PPI scandal, which surprised most of the UK
citizens as plenty of high street banks were involved in the scandal. Even
today, you can claim PPI yourself or consult a reliable company to
guide you in the process, if you were mis-sold a policy previously.
#8-Poor economic assumption
If
only economists would have been able to foresee the consequences, citizens
could have been protected from the repercussions. One cannot neglect the fact
that market situations are unpredictable but with elite expertise one can
probably anticipate changes in the market.
#9-Greed
The
desire to achieve thousand million pounds in a short run can be quite harmful
in the long run. It has been rightly said that, ‘easier it comes, faster it
goes.’ The desire to achieve a goal is a positive thought but there is a thin
line between desire and greed. When your desire surpasses a specific level it
turns into greed.
For
instance, bankers were paid exorbitant prices to secure toxic mortgages which
later on had an adverse impact on the reputation of the bank’s image. Playing
with legal and financial aspects is identical to playing with fire as you might
get burnt in the process.
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