Financial Institutions Instruments and Markets 8th Edition Viney Test Bank

Global Financial Crisis (GFC):

GFC hit the US in 2007, earlier US experienced this economic crisis in 1930. During this period, houses were selling at cheaper rate, borrower was defaulting with their payments (especially lower income borrower) and may of financial institution gone into liquidation or taken over by some other financial institution or government. Many of people have lost their job due decrease in production. Financial institutions like Bear Stearns has been sold to JP Morgan at very cheap price and Lehman Brothers has been collapsed. The American Stock Market lost $8 trillion during 2008. The unemployment rate increased to 10% in 2008 from 5% during 2007. GFC hit all over the world.

During GFC, many of the US financial institutions were affected even after providing injection by US government for $700 billion as bailout package. During GFC, Australian Government implemented two stimulus packages for more than $50 billion in late 2008 and early 2009 which helped in mitigating the effect of recession issues on real economies.

Commercial Bank:

There are four commercial banks in Australia. The central bank controls and regulate the activities of commercial bank. The primary role of commercial is to collect savings and provide loan.

Off-Balance Sheet:

Banks earns a very good income by providing other than loan and deposit service to the business users. In modern-day business creditors or investors (domestic or overseas) wants bank guarantee to avoid bad debt or loss. These types of transaction are contingent in nature and not recorded in the balance sheet hence it is called off-balance sheet transactions. Example: Letter of credit, bank guarantee, forward contract, currency swap and performance guarantee.

Earlier commercial bank was restricted of provide loan only upto the amount of savers balance available (capital base) to it, in another words banks were involved in the asset management. After deregularisation banks were allowed to raise capital from market which is called liability managemnet and off-balance sheet transaction. This deregularisation made the banks working with larger capital base. Now they could provide more loan without worrying about the savers balance in the savings account (capital base) with it.