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Requirement
write a report covering the risk, regulation and compliance.
Solution
Introduction
In this present paper we will mainly cover four areas namely: Global financial crisis 2007-2009 and its evaluation on global financial crisis with an inclusion of Eurozone case, new framework of regulatory system and the analysis of Eurozone case, Credit rating system accusation on Euro area crisis and potential effect of the introduction of European credit rating agent.
The global finance crisis of 2007-2009 has adverse effect on the financial and economic condition of the economy. The crisis has turned into a global economic crisis worldwide. It has adversely affected the emerging market economies, trading market, and others. The developing countries were indirectly affected economically. The European economy series includes important reports and communications from the Commission of the council and the parliament on the situations of economic and development. Since the 1930s, the real GDP shrinks approximately 4% which is the highest contraction in the European Union. The new regulatory framework has come with the tagline of building a secure system which covers all the aspects of financial markets and the issues related to compensation, dispute resolution, international and European issues, proper regulatory process with the coordination. The framework ensures that the measures were taken by the government for hedging the risk and ensures stability in the economy.
The credit rating agency is used to rate the company by debtors ability to payback their debt by paying interest on time. The rating also includes the creditworthiness of a company. The debt instruments comprise of corporate bonds, governments bonds, preference stock, collateral debt obligations and others. All the securities were downgraded to junk during the financial crisis of 2007-2009. The credit rating agency is mainly concerned with three Big agencies, and they control approximately 95% of the business.
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Evolution of Global Financial Crisis
The financial crisis in the year 2007-2009 is also known as the global financial crisis. It is considered as the worst financial crisis in the economy. The crisis leads to unemployment and the failure of the key business (Thakor, 2015). The financial crisis comprises of crashes of a stock market, sovereign defaults, and the crisis of currency. It directly impacts on the loss of paper wealth.
The European countries are mainly driven, by sentiments of global investors, fundamentals of micro economic and the liquidity condition of the certificate of deposit market. Some factors which are relatively important that changes with the span of time. The weak economic fundamentals in 2007-2009 include high current account deficit, worsening the balance of fiscal underlying, and the boom in the credit (Thompson, H. (2016). The factors also include declining in liquidity and spike in the aversion of risk which contributes to high spread in the countries such as Central, eastern and south-eastern European countries. The members of European countries includes Greece, Portugal, Ireland, and Spain.
The negative impact of the global crisis is shown in the peripheral of the continent. The biggest financial crisis in the European Union has come in the year 2001. The Greek is having sovereign debts and deficit budget in large amount. The sovereign debt is located in the countries such as Germany, Belgium, and France. The problem caused by the Greek non-performance issue is extended all over the Euro Region and it direct impacts on the currency union and after that on the political and economic region of the country. The problem of maintaining the single currency is known as “naughty boy” or a “sick man” in the European Union.
The problems faced by the member countries of European Union was tested for measuring the degree of participation met by the country with respect to the European Union economic norms and to check the protection of unity of the European Union and Eurozone. The member countries play an important role in the contamination risk of the crisis in the European Region. The stability and growth of Eurozone countries are violated apart from all the measures. The budget deficit rule violated by the member countries many times for example 5 times by Italy, three times by France, four times by Germany and Portugal and eight times by Greece. The violation is overcome by the centralization of the taxation and fiscal policies before the financial crisis. The consequences of issues have created change by the architect of Global financial crisis. The crisis leads to increment in unemployment, and social opponent throughout the European Union. The unification process and stability process is given by the ECB (European central bank) before the crisis so, the problems faced by the countries were different. The global financial crisis has affected the European countries adversely, and the projection was done by international economic institutions such as International Monetary funds and World Bank. The following figure shows the effect of a global financial crisis on the growth rates.
New regulatory framework
The financial regulatory system plays an important role in the supervision of financial institutions. The financial system provides guidelines and the framework with the aim of maintaining the integrity of the financial system in the economy. The new financial regulatory framework is required after the crisis because after the crisis the condition of the economy become worse and to overcome the impact of financial crisis on the economy new financial regulatory framework was required. The new framework includes measures such as remittance of risk and considering all the factors which address to the financial crisis (Morales, 2014).
The new regulatory framework is formed by the European Union, who has the monopoly to set the regulations; it seeks to develop a common set of frame for super visionary practices which have to be adopted by all regulators. The objectives, remits, and power of new regulations align with the new European supervisory authorities to ensure that the view of UK's is communicated at European level. The causes of financial crisis include: Failure of market, state failure and continues the debate. The policy framework of European Union for managing the crisis mainly builds on existing procedures and policies. The regulatory framework includes:
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Crisis prevention: In this stage, the appropriate regulation of the financial market is to mitigate the risk. The asset cycle is contributed by monetary and fiscal policies. The macro-financial stability includes the growth of a credit and house-prices.
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Crisis mitigation and control: The framework is control and indispensable. The independence role is played by the monitory policy. The automatic stabilizer is a complement to fiscal stimulus; it is required to strengthen such as an extension of unemployment benefits.
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Resolution of crisis: It acts as a coordinated framework which helps to exist from the policies such as financial, micro and macro economies. The depth of the system is determined by the severity of the financial crisis.
Eurozone case analysis
The implications of financial crisis on the major areas includes:
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Impact on Economic Activity: The economic activity is adversely affected by the financial crisis. The economic activities include the connection of financial system, an effect of wealth and confidence on the demand and global crisis. According to the forecasting by European Commission, the recovery of economic activities is relatively sluggish with the economic growth.
The following table shows the growth rate in the European Union:
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Symmetric shock with asymmetric implication: The financial crisis had a different impact on different countries. The following table shows the impact of financial crisis on the different countries:
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Impact on potential growth: The main determinants of the standard of living in the long run. The determinants also include gauge of economic slakes which is output gap in the short run. The crisis is the long-lasting impact on the potential growth rate.
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Impact on labor market and employment: The European market started to weaken at the time of crisis.The stability of employees is coupled with the increment in internal flexibility such as flexible working hours. The job losses in the pipeline are due to the effect of the financial crisis in the second half of 2008 (Makri, 2014). The following figure shows the unemployment rate in the European Union.
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Impact on budgetary positions: The fiscal cost of the financial crisis is very wide. The depletion in the potential growth due to the financial crisis creates pressure on public finance and contingent liability. The improvement in the position of fiscal is due to the improvement the growth of tax rich activity in the construction and housing activities. The European Union has adopted the windfall activities at the time of financial crisis.
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Impact on Global imbalances: The global imbalances narrowed in the United States. There is a pronounced decrease in the domestic goods. The oil prices increase in the first half of the crisis which marks the depletion of surplus in the second year of crisis due to which the Euro area switches from balanced current account position to the deficit. The following figure shows the trade balance in GCC countries and oil prices.
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Implication of the European Union: The global imbalances are determined for the Europe, which includes the decrease in a current deficit of US, which have a detrimental effect with the matching by adjustments in China. The impact of European countries is different by different adjustment response of European Union Countries.
Credit rating system triggered Euro Area crisis
The credit rating system is defined as the system which is used to evaluate the credit rik of the debtor which includes an individual, company, government, and others. It is mainly used to predict the ability to pay the debt and forecasting of the livelihood of the debtors. The credit rating agencies evaluate both the information: qualitative and quantitative of a debtor. The information is obtained by the credit rating analyst through public and non-public information provider. The report prepared by the credit rating agency is called as credit report which includes the evaluation of credit worthiness of an individual. The rating is of two types: short-term rating and long-term ratings.
Following are the main functions of credit rating agencies:
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Providing and Assessing information of investors: The main function of the credit rating agency is to assess the information of the investors which includes the information such as an ability to pay debt and others by their available information the rating is given by the credit agency. The rating is given by certain parameters such as business strategy which gives the information of credit quality of debt securities.
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Enable the issues for accessing the capital market: The credit agency is paid by investors for issuing the credit worthiness report of a company, and the agency receives revenue for rating. The rating lasts for many years which help the company to enter into various financial market segments.
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Facilitating regulators to regulate: The rating system is also important from the perspective of the regulator. The regulator used credit rating system to evaluate the risk held by the regulator entities. The regulators widely use the rating by nationally recognized statistical rating organizations.
The credit rating system plays a credible role in the European Union financial crisis. The credit rating system does not disclose the risk due to which financial system verge to collapse on The European Union says there should be less reliance on the major agencies. The major companies include Moody's, Standard and poors and Fitch. The European Union has given the authority to European security and markets authority for analyzing the methodologies used by the credit rating agencies. The credit rating agencies play a vital role in the financial market because they provide the information such as creditworthiness of a company, and this information is very important because it impacts on the growth of a capital market in the economy. The credit agencies are highly influenced by the supply of credit to the firms and not accountable to their actions.
Credit rating triggered financial crisis
According to the US Congressional report, the report made by Moody's and Standard and poor's had triggered the financial crisis because the agencies had slapped on the complex mortgage-backed securities when the agency was forced for downgrading the inflation rate (Baum, 2013).The number of documents was reviewed which shown the causes of financial crisis. The focused was made by the two rating agencies: and the Fitch rating is not studied. The rating given by the agencies are given by their paying so that their products were sold through their credit rating report. In the year 2007, the securities such as mortgage-backed securities and collateral debt obligation have lost its value, and it became difficult to sell. Subsequently, the securities were collapsed in the capital market. The housing prices in the year 2006 start decreasing due to which the refining become difficult, and delinquencies in the sub-prime residential mortgage start increasing rapidly. The volume of rating downgrades was unprecedented in the US financial market. The downgrades have created disorder in the securitization market.
European credit rating system
The European credit rating system refers to the system which is based on to the European Union with the mission "to meet regulatory requirements together" and reducing the cost of supporting activities. The information should be easy and effective with the regulation and supervisors. The main purpose of credit agency includes promotion of credit ratings across Europe and it also includes the promotion of the interest of the European credit rating agencies. The four core elements of European credit agency rating system includes European Union legislation, EACRA transparency, and the rating agency.
The Euro has given the excessive power to the rating system to influence the market due to which the competition between the three major agencies has increased. The potential effect of the credit rating system includes support in the EU funds. The introduction of European credit rating system has increased the competition in the sector and secondly it also helps to combat the perceived US biased of the three rating agencies. The objective of New European rating platform includes that all the rating to be registered under EU registered and authorized rating agency and it should be published under central European rating platform, ESMA (European security and market agency) which helps to improve the vision and comparability among the dent instruments. The platform also includes the small and medium sized credit rating agencies which are operating under the European Union.
The potential effect of European credit rating includes a major impact of today's financial market because the rating is considered by investors, government, borrowers, and issuers. It plays an important role because the downgrading directly impacts on the capital level of the company.
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In this report three major areas were discussed which includes: Global financial crisis 2007-2009 and the evaluation of Eurozone case, major implications in the new financial regulatory system and analysis of Eurozone case, and third area discussed includes the credit rating agents accused of worsening the Euro Area crisis because of their negative rating system and the potential effect of introducing European credit rating agency.
The Global Financial in 2007-2009 has adversely affected the financial market. The Eurozone member countries have affected differently due to which new financial regulation system in required. The new financial regulation system is prepared by considering all the factors of systematic financial crisis, risk, liquidity and others. The three new legislation bodies have also introduced in the financial market. The credit rating agencies neither received any financial incentive for their difficult credit ratings, so the companies start increasing their revenue through giving paid rating to the companies. The credit rating of the very securities through boosted stock prices, increment in the executive compensation and others.
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Alsakka, R., & Ap Gwilym, O. (2013). Rating agencies’ signals during the European sovereign debt crisis: Market impact and spillovers. Journal of Economic Behavior & Organization, 85, 144-162.
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Amtenbrink, F., & Heine, K. (2013). Regulating Credit Rating Agencies in the European Union: Lessons from Behavioural Science. The Dovenschmidt Quarterly, (1).
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Baum, C. F., Karpava, M., Schäfer, D., & Stephan, A. (2013). Credit rating agency announcements and the Eurozone sovereign debt crisis.
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Makri, V., Tsagkanos, A., & Bellas, A. (2014). Determinants of non-performing loans: The case of Eurozone. Panoeconomicus, 61(2), 193.
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Morales, J., Gendron, Y., & Guénin-Paracini, H. (2014). State privatization and the unrelenting expansion of neoliberalism: The case of the Greek financial crisis. Critical Perspectives on Accounting, 25(6), 423-445.
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Thakor, A. V. (2015). The financial crisis of 2007–2009: Why did it happen and what did we learn?. Review of Corporate Finance Studies, 4(2), 155-205.
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Thompson, H. (2016). Enduring capital flow constraints and the 2007–2008 financial and euro zone crises. The British Journal of Politics and International Relations, 18(1), 216-233.
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United Nations, (2010). the financial crisis and economic crisis of 2008-2009 (p. 20).
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