Global Financial Crisis Research Paper Example | Topics and Well Written Essays - 4250 words

Global Financial Crisis - Research Paper Example (Avgouleas, 2008). In addition other major investment banks such as Merrill Lynch, Citigroup, UBS, and JPMorgan have all announced negative earnings in their last financial reports as well as plans to lay off a significant number of workers. This paper carries out a comparative review of how the credit crunch affected Northern Rock in the UK and other major United Kingdom based bank. These other banks include, the Royal Bank of Scotland, Halifax Bank of Scotland and Bradford and Bingley. The first part of the paper provides an overview of the current financial crisis stressing on what caused the crisis. The second part looks at the different business models of these institutions, their risk management strategies, control procedures put in place following the crisis. Section 3 looks at the regulatory environment of both banks; the liquidity position, debt to equity ratio and the financial positions of the company. The last section provides conclusion and recommendation. Sub-prime loans are loans offered to borrowers with no prior track record of good credit history. (Shaffer and Hoover, 2007). Due to the risk inherent in the loans, they are often issued at very high interest rates so as to compensate for the extra risk that they carry. (Shaffer and Hoover, 2007). A sub-prime crises or credit crunch is said to exist when a significant number of sub-prime loans have been issued to unscrupulous borrowers. (Shaffer and Hoover, 2007). These crises pose difficulties to both financial institutions and the borrowers. The outbreak of the recent sub-prime crises came after warning signals of write-downs in the value of mortgages late last year. (Schumer and Maloney, 2008). House prices in the U.S witnessed an unusual growth between 1997 and 2005. For example, prices increased by approximately 85% during this period. The period 2001 and 2005 witnessed the highest rates of appreciation. (Schumer and Maloney, 2007). Sub-prime delinquencies and foreclosures were therefore mitigated by house price appreciations during these years. This is so because borrowers facing difficulties to make regular mortgage payments could depend on the appreciation of the value of their property to solve their financial problems by refinancing the mortgage and withdrawing cash from the increased equity in the house thereby sustaining the new mortgage for a while. However, house prices began to decline in 2006, and as at October 2007, prices were down by approximately