CHAPTER ONE
1.0 INTRODUCTION
As the International Monetary Fund, IMF observed, the extent and severity of the crisis that began with the bursting of the housing bubble in the United States in August 2007 reflects the confluence of myriad of factors some of which are familiar from previous crises, while others are new. As in previous times of financial turmoil, the pre-crisis period was characterized by:
(i) Surging asset prices that proved unsustainable;
(ii) A prolonged credit expansion leading to accumulation of debt;
(iii) The emergence of new types of synthetic financial instruments;
(iv) Regulatory failure.
This time around the rapid expansion of securitization (not itself a new phenomenon), which changed incentives for lenders and lowered credit standards caused the crisis. Systems became fragile because balance sheets became increasingly complex (further complicated by increased use of off- balance-sheet instruments). Financial market players were highly leveraged and relied on wholesale funding and external risk assessments. Cross-border spillovers intensified after the crisis started because financial institutions and markets across borders were closely linked and risks highly correlated.
No doubt, the world is inextricably linked by globalization. Thus, the economic and financial crisis, which started in the United States, destabilized markets and economies (developed, developing and underdeveloped) around the globe and has continued to dominate discussions on the global economy. These days one would hardly watch the television or browse through national and international newspapers, magazines and journals without stumbling upon headline news of how political leaders are scrambling for strategies to mitigate the impact of the financial crisis on the domestic and global economy.
As rightly pointed out in several quarters, the global financial crisis has been a major constraint to growth in most countries, a situation that has been aggravated by banking system crisis. The theme of this lecture is, therefore, very pertinent as it provides opportunity for the academia, researchers and policy makers to explore alternative policy and practical steps that can be taken to stem the tide of recession, especially in developing countries like Nigeria.
Carl Menger in his 1871 seminal work on economic principles opined that “All things are subject to the law of cause and effect”. It is imperative to argue here that, there is no exception to this great principle in the light of the origin and cause(s) of the global financial crisis and its consequences. As a corollary, we live today, in an era in which economic liberalism and small governments is so much propagated, and in which, it is generally expected that self regulation of markets is the best way of promoting competition, productivity, efficiency and growth. An unarguable guide for lovers of freedom and adventure is the fact that ‘freedom has responsibility’. While the freedom to innovate has led to the rapid development of the financial market in major industrialized countries and emerging markets, it has become clear that there is an inherent danger in the manner the markets were developing without proper supervision and moderation. Innovation has worked in the financial markets and has contributed significantly to the process made possible by laissez faire.However, the same innovation that deepenedthe financial markets also accentuated predatory, unsecured and irresponsible lending behavior among financial institutions thus, exacerbating the global meltdown. The focus of this lecture is on the Nigerian experience. I believe that my audience at this lecture today will share some perspectives on the subject, drawing from their individual experiences. The critical challenge that Nigeria faces today as a nation is how to create some irreducible minimum standards of financial system stability that will promote strong financial institutions and the emergence of budding banking system, and hence ensure sustained growth and development in Nigeria and indeed in the rest of Africa.
The lecture is intended to stimulate discussions, and enable policy makers to come up with ways of identifying specific institutional arrangements and practical mechanisms that would expand financial services to economic agents in Nigeria. The focus is on developing, over time, an efficient and sustainable banking sector for economic activities to thrive. The vision is for a system that integrates the domestic, foreign, short and long term sources, where banks can exploit each others’ comparative advantages in cost-effective financial services delivery.
1.2 statement of problem
When an economy is in recession and official interest rates are close to zero, further interest cuts are impossible. This is the situation that faced most national economies and monetary unions during 2008 and 2009. In this situation, quantitative easing may be necessary to boost liquidity and stimulate lending.
A shift in mortgage lending toward the less creditworthy, marginal borrowers, or sub-prime borrowers who do not qualify for prime mortgage. Also, in the sub-prime market, more than half of the loans were made by independent mortgage brokers who were not supervised at the federal level, unlike banks and thrift institutions.
1.3 research question
- How best to control or regulate banks?
- Can the fiscal policy be able to get liquidity into the global system?
- How to deal with the after-effects of the banking crisis?
- In what other ways can the federal government help to reduce this financial meltdown?
- Can budding banking system help to stabilize financial meltdown?
1.4 research hypothesis
H0: there is significant effect of financial meltdown on the performance of banks in Nigeria.
H1: there is significant effect of financial meltdown on the performance of banks in Nigeria.
1.5 aims and objectives of study
- To determine the effect of financial meltdown on the performance of banks in Nigeria.
- To determine the best way to get liquidity into the global system
- To obtain the best way to deal with the after-effects of banking crisis
- To determine the best way to regulate the banking activities.
1.6 significance of study
At the end of this project work, we will be able to determine the effect of financial meltdown on the performance of banks in Nigeria. The research work will provide the best way to get liquidity into global system, the way for forward for the after-effects of banking crisis and also to regulate the banking activities in Nigeria.
1.7 scope of study
The research work covers the area of global financial meltdown, it causes and solution to the after-effect of banking crisis. It also covers the area of reform in the banking sector of Nigeria.
1.8 Definition of terms
- Financial crisis: The term financial crisis is applied broadly to a variety of situations in which some financial assets suddenly lose a large part of their nominal value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and many recessions coincided with these panics.
- Financial meltdown: Refers to events like steep fall in stock markets, decline in asset values, corporate losses etc. that hurt the economy and lead to losses for investors.
- Reform: means the improvement or amendment of what is wrong, corrupt, unsatisfactory, etc.
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