Credit Crisis and US Financial Market Liquidity

The impact of the credit crisis on US financial market liquidity

The modern world depends on the state of the global economy greatly as the changes in the structure o the world market will affect the majority of countries involved in international relations. For this reason, the world financial crisis is a real challenge for economies and financial systems of states as it results in the contraction in manufacturing, economy shrinking, and market collapse. The 2008 world financial crisis proved the inability of leading states to introduce some efficient measures and mitigate the negative aftermath of the unstable situation at the international level. The USA was one of the countries that suffered from the recession triggered by the world financial crisis. Moreover, it promoted the credit crisis and undermined the US financial market liquidity.

Besides, the above-mentioned crisis was the greatest shock to the US banking system since the times of Great depression and introduced some questions related to the liquidity risk (Pedersen, 2008). According to the widely accepted pattern, financial institutions provide liquidity to their depositors and creditors by standing ready to provide the cash on their demand (Perry, n.d.). However, in terms of the 2008 world financial crisis and recession of the US economy, several creditors were not able to fulfill the obligations under an agreement and triggered the development of the credit crisis. This crisis implied the absence of funds to perform various financial operations and satisfy the existing needs. Moreover, the credit crisis obviously impacted financial market liquidity.

Nevertheless, the given term means the markets ability to purchase or sell an asset without any serious oscillations in its price (Perry, n.d.). As it results from the definition, liquidity depends on the stability of the market and the ability of all its actors to make various bargains. In this regard, the credit crisis poses a great threat to financial market liquidity as it deprives some actors of a chance to participate in various processes and fulfill their obligations. In the USA in 2007, the great part of the population and nonfinancial firms lost access to funds because of the crisis (Strahan, 2012). It resulted in the collapse of the financial sphere and the deterioration of the liquidity.

Additionally, the total number of loans provided by banks also reduced.

Total loans.
Figure 1. Total loans (Strahan, 2012).

The combination of these facts could not but trigger the development of negative processes in the sphere of economy and finances. The fact is that banks finance their balance sheets with deposits and equity capital (Strahan, 2012). The other sources are not so significant and could not change the whole image significantly. However, the main sources of income were impacted by several negative factors in terms of crisis. People did not have any desire to make deposits or perform some other financial operations. It obviously hurt the financial market liquidity as to guarantee the further existence and development banks had to increase the prices and introduce several practices aimed at the provision of certain financial stability.

In these regards, one realizes that the 2008 world financial crisis triggered several processes that had a pernicious impact on the state of the economy and financial sector. Additionally, the credit crisis promoted the appearance of numerous problems related to financial market liquidity as being not able to use traditional sources of income banks had to use oscillations of prices and to introduce severe measures.

References

Pedersen, L. (2008). Liquidity risk and the current crisis. Web.

Perry, B. (n.d.). Credit Crisis: Market Effects. Web.

Strahan, P. (2012). Liquidity Risk and Credit in the Financial Crisis. Web.