In 2008, the financial world witnessed a grave crisis whose detrimental effects are still visible today. In order to fully appreciate the impact that the 2007-2008 financial crisis has had on the banking sector, suffice to say that banks and financial institutions lost approximately $2.2 between 2007 and 2009 (ECB, 2009). In order to minimize the negative consequences of the Global Crisis while preventing similar events from occurring again, financial analysts, economists and policy makers have come up with different methods to deal with the 2007-2008 stock crisis.
As the former Vice President of the European Central Bank (ECB, 2009) argued in 2009, a combination of macroeconomic policies and ad hoc measures had to be implemented in order to boost aggregate demand and support banks in such a way to inject credit into the global economy; he also argued that larger economies – especially the United States, where the stock crisis originated as a result of illicit practices and the collapse of the U.S. housing bubble – were responsible for stimulating world trade while stabilizing the global financial market through new regulations.
According to Blundell-Wignall, Atkinson & Se-Hoon (2009), crisis management is a process that consists of a number of stages, each of which must be handled with extreme care in order to tackle urgent issues and promote long-term stability. From a practical perspective, Blundell-Wignall et al. (2009) suggested that governments deal with crises like the 2007-2008 stock crisis by first identifying their causes and acknowledging their mistakes. This is a very important stage as denial would prevent policy makers from developing effective measures aimed at reducing the effects of the crisis on the real economy and modifying the regulations that led to the crisis in the first place (Blundell-Wignall et al., 2009).
As a result of globalization – and the continuous erosion of trade barriers between nations – the 2008 stock crisis affected numerous economies all over the world, thus making it necessary for governments, policy makers and standard setters to establish new long-term goals so as to restore their credibility.
After all, had they simply focused on short-term policies aimed at minimizing the negative impact of the financial crisis, they would have been unable to address the issues that destabilized the financial sector. As Blundell-Wignall et al. (2009) noted, balancing apparently contradictory principles such as prudence and competition and promoting transparency by developing new sets of financial reporting standards proved to be extremely effective ways of dealing with the 2008 stock crisis. That is because financial analysts found that illicit reporting practices and a general lack of transparency contributed greatly to creating a remarkably deregulated environment where brokers were mainly interested in earning as much as possible, while consumers were made to believe that they could obtain credit very easily, regardless of their credit history.
What made the 2008 financial crisis particularly difficult to tackle was the fact that due to its magnitude, various governments and standard-setting bodies had to cooperate and coordinate their activities in order to strike the perfect balance between temporary measures and long-term goals (Blundell-Wignall et al., 2009). As Blundell-Wignall (2009) pointed out, impaired losses contributed greatly to decreasing transparency within the global financial sector.
As a result of that, governments and policy makers had to pay special attention this particular issue. There exist four main ways to deal with impaired losses: the AM approach, nationalization – whether complete or partial, ring fencing and mergers (Blundell-Wignall et al., 2009). Analyzing the way in which different countries responded to the financial crisis, it appears evident that all four approaches have been adopted in order to promote financial stability and minimize the negative effect of the crisis on consumers.
During the past few years, the IFRS Foundation and IASB have been working hard to reform their International Financial Reporting Standards in order to address the specific weaknesses that contributed to the 2008 financial crisis and the following economic recession. For example, the IAS 39 (an accounting standard concerning the measurement and recognition of financial instruments) has been harshly criticized for its inability to force financial institutions to recognize losses in a timely manner, thus preventing consumers from making informed decisions based on accurate financial information.
As a result of that, the IFRS Foundation and IASB have replaced the IAS 39 with a new set of standards known as IFRS 9 (IFRS Foundation, 2015). The new standards have been developed in such a way to force banks and other financial institutions to adopt a forward-looking approach to impaired losses, so that expected losses are recognized in a timely manner (IFRS Foundation, 2015).
With regards to the world’s response to the financial crisis, Savona, Kirton & Oldani (2011, pp.19-25) argued that in order to identify the best methods to deal with a financial crisis, one should first analyze the events that preceded it. According to many analysts, the 2007-2008 stock crisis was triggered by a variety of problems in the United States, where the financial sector had been deregulated severely since the 1970s in order to enable home buyers to obtain credit and get on the property ladder more easily (Savona et al., 2011, p. 20).
After acknowledging these problems, both developed countries and emerging markets attempted to stabilize their financial markets in different ways. China, Japan and the United States used monetary policy easing as a first line of defense against decreasing domestic demand (Savona et al., 2011, p. 25).
As far as fiscal policies are concerned, all three countries developed stimulus packages: the United States relied heavily on direct spending, Japan focused more on energy credits and China found itself having to stimulate domestic demand for the first time in history – due to its lack of experience (Savona et al., 2011, p. 25).
- Blundell-Wignall, A., Atkinson, P. & Se-Hoon, L. (2009). Dealing with the Financial Crisis and Thinking about the Exit Strategy. Retrieved from http://www.oecd.org/finance/financial-markets/43002511.pdf
- ECB (2009). How to deal with the global financial crisis and promote the economy’s recovery and sustained growth. Retrieved from https://www.ecb.europa.eu/press/key/date/2009/html/sp090326.en.html
- IFRS Foundation (2015). Financial Instruments—Phase II: Impairment. Retrieved from http://www.ifrs.org/Current-Projects/IASB-Projects/Financial-Instruments-A-Replacement-of-IAS-39-Financial-Instruments-Recognitio/Impairment/Pages/Financial-Instruments-Impairment-of-Financial-Assets.aspx
- Savona, P., Kirton, J.J. & Oldani, C. (2011). Global Financial Crisis: Global Impact and Solutions. Surrey, UK: Ashgate Publishing.