Introduction
The recent global financial crisis happened between the years 2007 and 2008 that was a serious threat to the financial markets in the United States and the rest of the world. The previous global financial crisis was during the great depression of the1930’s.
The decrease in consumer’s wealth and decline of the economic activities were attributed to the global financial crisis, wounding up leading businesses and companies in the world. Decrease in the wealth of consumers was estimated in trillions of US dollars.
The downturn of the economic activities led to the 2008-2012 global recession and contributed to the European sovereign debt crisis. Some of the causes of financial crisis resulted from government policies having promoted easier access to loans for borrowers and encouraged home ownership.
In addition, the policies in place caused overvaluation of the mortgage loan assuming that the prices for houses would continue to increase. The indicators of financial crisis in the financial institutions occurred when they lacked enough capital to secure their financial commitments
Due to the financial crisis, financial institutions collapsed, the performance of the stock markets declined, and most of the banks were assisted by the government to write off their debts.
In finding the solution to the financial crisis, people’s concern was that many who were responsible for the financial problems were the ones who were bailed out. The global financial crisis meltdown affected most people in the world, and no one could escape its effects.
The housing sector could not avoid the impacts that came along with the global financial crisis. The main causes that made the effects of the global crisis so severe in the housing sector were caused by the influential people who supported that economic model and did not incorporate the view of the others
Impact of the global financial crisis on financial markets across the world
The financial crisis became a global crisis though it had first begun in the United States and then spread to Europe. The global financial crisis gave rise to negative effects in the financial markets in different countries, and the emerging markets.
The financial markets affected by the financial crisis were majorly influenced by the performance of the financial institutions. The financial crisis has shown the negative side of the financial institutions. It is believed that the financial institutions were the major contributors to the financial crisis.
This is because they created risky products; encouraged excessive borrowing among consumers, and engaged in high risk behaviours. These risky behaviours may include giving out large positions in mortgage backed securities.
The financial sectors and the emerging markets were affected by the financial crisis in 2008, following distrust between financial market participants. Due to the effects of the financial crisis, it led to the breakdown of the short-term financial transactions and the depreciation in the global securities exchanges.
One of the notable events that indicated the beginning of financial crisis was with the announcement by the BNP Paribas, a global banking group located in Paris. BNP Paribas cited a complete evaporation of liquidity; this blocked the withdrawals from three hedge funds.
The importance of this event did not directly influence the economy, but it led to the panic by investors and savers as they tried to liquidate assets deposited in highly leveraged financial institutions (Gup 2010, p.24).
It was estimated that the large US and European banks lost a lot of money from 2007 to 2009 through bad loans and toxic assets. This loss was expected to increase in $ 2.8 trillion from 2007 to 2011. The companies affected by the financial crisis were those involved in mortgage lending and home construction.
In the end, they could not obtain financing from the credit markets. These firms were subject to government takeovers. Between 2007 and 2008, 100 mortgage firms went bankrupt and were closed. China was the next leading economic superpower after the decline of financial markets in the United States.
Before the financial crisis, from 2004 to 2007, the market had been calm and stable. The inconstancy of the financial markets was below long-term averages, as predicted by the S&P 500 and VIX index. The 2008 financial crisis changed the market volatility where the asset classes had a significant pull back.
The correlation between them and the financial market became extremely volatile. During that financial crisis, the S&P 500 lost approximately 56% of its value, and the VIX index lost triple more than the S&P 500 did.
The poor mostly felt the impact of the global recession. Financial markets in the developing countries were affected mostly because most of the policies set by the banks and financial institutions were pegged on the developed countries. Philippine, as one of the developing countries, was affected by the 2008 global crisis.
Due to the downfall of Lehman brothers, the benchmark of the Philippine stock exchange index dropped by 9.3%. This trend has been decreasing up today. Due to the effects of the financial crisis, most of the investors in the Philippines withdrew their investments in the country, paying attention to the counter party risks.
Turnover in global foreign exchange markets during the global financial crisis
Turnover in the global foreign exchange markets during the global financial crisis was significantly affected. These effects were not as severe as those reflected in the financial markets.
Some of the factors that influenced the turnover in the foreign exchange markets were the market participants that included the commercial companies, central banks, hedge funds as speculators, and foreign exchange fixing.
The market participants, who acted as buyers in the foreign exchange, determined the turnover as they tended to seek for the currency to settle their debts in different currencies. From 2007 to 2010, the turnover increased by 20%.
Using the triennial survey report, the growth in the global foreign exchange market activity increased in 2010 (Appleton, Plummer & International Trade Law Center 2005, p.185).
The foreign exchange market activities may include spot transactions, outright forwards, foreign exchange swaps, currency swaps, and currency options.
Turnover data collected semi-annually by foreign exchange committees in six financial centres showed that the global financial crisis resulted in a decline in the growth of the global foreign exchange turnover. The committee showed the turnover fell by approximately 25 percent from its peak.
This fall of turnover went up to US$2.3 trillion in 2009. The nature of the financial crisis was reflected in the decline in the turnover in the foreign exchange centres.
This fall in turnover in the global foreign exchange was evident in the United States and the UK as it was the biggest fall in all the six financial centres. Decrease in the turnover in Australia from 2008 to 2009 was by 25 percent.
High frequency traders increased the turnover in the foreign exchange markets. This was transferred from the equity to the foreign exchange markets. With the growth of electronic trading, boom in the high trading frequency in the foreign exchange market increased rapidly.
The turnover in the foreign exchange market, as a result of that increase, curbed the financial crisis. From 2007 to 2010, the spot turnover with other financial institutions increased as compared to that with the dealers.
The problem with the high frequency traders was that they had no data confirming their share in the foreign exchange market, even though they had contributed to the growth (Nightingale, Ossolinski & Zurawski 2010, par. 13).
Factors that influence turnover in global foreign exchange markets during the global financial crisis
Some of the factors that influenced the turnover in the global foreign exchange markets during the global financial crisis were diverse and did not depend on each other. One factor was the customer’s demand that resulted from investing in different countries and international trade.
Turnover may have also been influenced by such factors as changes in the buying and selling behaviour of the participants in the market, and new technology (Nightingale, Ossolinski & Zurawski 2010, par. 7).
The market participants included the business companies, speculators, market hedgers, the interbank market, central banks/federal and foreign governments.
The turnover in the foreign exchange market was determined by the economic and structural factors for the three years (Nightingale, Ossolinski & Zurawski 2010, par. 7). The slow growth in the turnover for the global foreign exchange market was due to the effects of the global financial crisis.
Another factor that influenced the global foreign exchange market was the global trade. The global trade and non-financial institutions like exporters and importers influenced spot and forwarded turnover.
For successful transactions between the exporter and the importer, one party must exchange the domestic currency with the invoice currency in settlement of debt.
Dealers who managed risks created by interdealer markets and customer’s transactions also influenced the turnover of the foreign exchange market (Nightingale, Ossolinski & Zurawski 2010, par. 8).
Willingness of investors to engage in cross border investment during the global financial crisis was another factor that influenced the turnover on the global foreign exchange market. This was a key driver for the demand for the foreign exchange.
The investor’s hedge risks arose from acquiring assets in the foreign currencies. The instruments used by banks were also determinants of the turnover in the foreign exchange market (Nightingale, Ossolinski & Zurawski 2010, par. 8).
The instruments included the foreign exchange and the cross currency swaps that facilitated cross currency borrowing and lending.
What are your thoughts on the impact of the global financial crisis on the turnover in foreign exchange markets?
Global financial crisis had a negative impact on economy. Foreign exchange market could not avoid its effects. In the foreign exchange market, the main participants were the business companies, speculators, market hedgers, interbank market, central banks/federal, and foreign governments.
The global financial crisis first affected the financial institutions, such as the banks, insurance firms, and the mortgage firms, and then the foreign exchange market.
When the financial institution had not forwarded the loans to the borrowers, the foreign exchange market also lacked the currencies, thus having affected the turnover.
The 2007-2008 global financial crisis relatively late affected the foreign exchange market. At the beginning of 2007, it was evident that fixed income markets were under a lot of stress, and in the mid months, the market neutral equity portfolios suffered substantial losses.
The traditional financial risk analysis that captured systematic effects failed. Due to this, many investors lost large amounts of money through the currency market.
As a result, the turnover in the foreign exchange market had reduced which strained the foreign exchange market when it came to recover its status to its original turnover.
From this, it was evident that the financial markets had different ways of handling the financial crisis as compared to the investors, who determined the turnover of the foreign exchange markets.
The government and the policy makers should have come up with strategies that would help the foreign exchange markets avoid the impact of the financial crisis. If the policies were well implemented, the investors’ deposits and returns would have been secure.
Most of the currency investors used the buying strategy known as the carry trade. This strategy involves buying stock in high interest rate currencies and selling the stock in the low interest rate currencies also known as taking a short position.
A carry trade investor will bet that the exchange rate offsets will not occur, and the differential interest will be earned. When the financial crisis arises, the interest rates returns decrease, and investors, in return, suffer huge losses, thus there is less turnover in the foreign exchange market.
When the financial crisis comes into place in an economy where the investors do not have a security of their invested stock, they tend to suffer huge losses.
If there are fluctuations of currency, and the interest rates of different countries change, the investor losses a lot of money and the turnover of the foreign exchange market is significantly affected.
The collapse of the Lehman Brothers also greatly affected the foreign exchange market in the USA. With the collapse of the Lehman Brothers, firms relied on it were affected during the financial crisis. This firm held a lot of stock in the foreign exchange market in the US.
When it collapsed, it negatively affected the turnover of the exchange market. This indicated that this company was a main stockholder in the foreign exchange market. The foreign exchange markets should let more firms invest in the stock market and not depend on one company.
If the financial crisis arises, the turnover of the foreign exchange market will not be adversely affected, since different companies react differently to the financial crisis. Some firms might be strong enough to withstand it while the others may be dissolved due to lack of funds.
Reference List
Appleton, A, Plummer, M & International Trade Law Centre 2005, The World Trade Organization: Legal, Economic and Political Analysis, Springer, New York.
Gup, B 2010, The Financial and Economic Crises: An International Perspective, Edward Elgar Publishing, Cheltenham United Kingdom.
Nightingale, S, Ossolinski, C & Zurawski, A 2010, Activity in Global Foreign Exchange Markets. Web.