Assignment nr 4; The Financial Crissis (European banks)

The financial Crissis

For today’s blog I want to give a short introduction on the financial crisis, what happened, what could have happened, who are in trouble, why and what will happen in the future.

History

To start with, some basic information about the financial crisis or big recession or even depression of the ‘10’s as it will be famous for in about 30 years, or so. The financial crisis which started in 2007 and is active to the present day was triggered by a liquidity shortfall in the United States banking system. Because of this liquidity shortfall, banks and other large financial institutions where no longer able to “stand alone” and faced bankruptcy. Most of these institutions where or are simply “to big to fail”. Meaning, when such an institution collapses it takes multiple other organizations on different levels with it, which could lead to a crisis or even collapse of the entire financial system as we know it today. The part on different levels is highlighted because many different parties (people, companies small and big) have placed their funds in this institution, parties from all levels. Therefore not only a few companies will suffer from such a bankruptcy.

Due to the fact that the financial system is fully irrigated, banks, institutions and even economies all over the world, are or at least were affected or suffered from the problems which originally started on the American housing market. Under which various European banks such as ING Bank. Resulting in billions of losses which these companies were not able to cover. And as they were/are too big to fail, the government needed to give financial support.  

What happened ?

As mentioned earlier, different banks and financial institutions in Europe received state-aid. For Dutch people, the ING bank or for some ABN Amro-Fortis are the most important. Because these are the institutions which the government needed to help.

Due to the financial crisis (and miss management) Fortis bank went bankrupt or at least almost. Rapid intervention was needed to protect other banks from the same destiny which Fortis faced. Because Fortis bank had fallen, press and people speculated a bankruptcy of other banks, like ING Bank. Although ING bank was solvent enough, it needed to be protected for a loss in confidence of clients, because when clients lose confidence they will take all their funds away, phenomena also known as Bank run. Therefore the Dutch government gave the ING Bank 10 billion euro to restore their capital and liquidity. I consider this irrelevant and illegal because of European law. Articles 106,107 and 108 state stat it is illegal for governments to give financial support to public organizations. Unless it is in favor of European citizens. In these cases, these companies toke that risk. In my opinion, the state needs to harden the rules and regulations regarding bank liquidity, only to prevent it from happening in the future.

Secondly, in my opinion the euro crisis which currently plays a big role in the surviving of the European Union can be seen as an indirect result of the crisis which started in the year 2007. Due to governments which had the necessity to keep on helping these companies; banks, financial institutions building companies and many other companies.  I personally hope that the European union will survive and that it creates a new set of rules to prevent this from happening in the future.

Thanks for reading... Ralph Poppelaars