The banking crisis of 2007-2008 precipitated the deepest global Essay

The banking crisis of 2007-2008 precipitated the deepest global recession since the 1930s and has led to calls for significantly - Essay Example In this case, obviously something went wrong somewhere or the signs were ignored. Part I of the paper will critically assess whether or not this crisis has fundamentally undermined the corporate governance frameworks in both the UK and USA. Part II of the paper will assess how to change the current frameworks to lessen the likelihood of a recurrence in the future. PART I: The Banking Crisis of 2007-2008 and its Impact on World Economies It all started with an excess of lending in the mortgage sector of the USA. The economy was going well and life was good. It seemed that the good times were here to last and there was no letting up. In the UK things were largely happening in a similar vein. Lending on mortgage loans had assumed alarming proportions as had consumer credit; it was said that the UK economy in 2007-2008 was the most indebted in the world (UK House Building Market Report, July 2010). Bankers were even giving housing loans to consumers whose credit history was patchy- meani ng that they had defaulted on loans in the past and were likely to default again- and pocketing fees and commissions in the process. This is called the sub-prime mortgage sector. And then it finally happened. Bankers who had previously considered even people with a bad credit history as good enough for taking a loan now began to cut back on lending in the interests of risk control and compliance. As the economy shrunk and credit dried up, bankers began to call on the sub-prime mortgages and the consumers were left with nowhere to turn to. Imagine their predicament as interest rates rose up and they had to give up their houses because they could not pay up the loan instalments. It was havoc and pandemonium in the housing sector. As the crisis deepened, the banks that had not provided adequately for bad debts in the real estate sector were adversely affected. Merrill Lynch and Lehman Brothers in the USA and Northern Rock in the UK were institutions that were brought down by the crisis ; others like Royal Bank of Scotland were forced to sell off parts of their businesses, divest and re-organize themselves. For institutions like international banks, who have diversified their investment portfolios across the world in different continents to spread risk, it was inevitable that their holdings were impacted in some way or the other. AIG and Citibank in the USA, Deutsche Bank in Europe, Citigroup in the USA and Standard Chartered in the UK were all offered stimulus packages that have helped them recover rather than join the ranks of the bankrupt companies. To date in excess of 400 small and large banks have had to bite the dust. At the Heart of the Crisis At the heart of the banking crisis lies the root cause of it all. Actually it is never one factor but a combination of factors that interact or add on to the unfolding crisis and make it inevitable. Prior to the 1930s crash was the period of the Roaring Twenties, a time of unprecedented growth and stability. People ha d borrowed against everything they had and even resorted to margin trading to take advantage of the stock market boom. It seemed that the bull market would last forever. But by July 8, 1932 the DJIA had lost 88 percent of its value and closed at 41.22, its lowest point in the 20th century. By 1933 the depression