Auditing and assurance Essay Example | Topics and Well Written Essays - 3250 words

Auditing and assurance - Essay ExampleTherefore, this report will discuss the background of the financial crisis and the proposals tabled by the commission. 1. Background of the financial crisis The financial crisis started in the year 2007 and spread with intense in 2008 despite of the central banks and regulators effort to steady it down (Merkel, 2012). In early 2009, the global economy was experiencing recession and the only way out was to focus was on preventing the downtown from prolonging to a great depression. The idea causes of the financial crisis had to be looked into so as to take a cause of action (Se Hoon et.al 2008). Everyone one was responsible for the financial crisis from the government, auditors, credit agencies, banks and the public. But most of the causes broach from banks and financial institutions since they are responsible for regulating monetary policies and financial stability. Banks and other financial intermediaries play a critical role in the financial corpse thus it is vital to understand their role (Allison 2012). For instance, they respond to contagion meaning that one ball over can affect a wide area. Therefore, if a shock is experienced by the banks, because the whole financial sector will experience the same impact. According to Allen (2001), a study conducted shows that when banks are have opposite network structures, they likely respond to contagion. Diamond (1996) points out those banks insure against liquidity shocks by having their interbank deposits exchanged. As a result, swapping of deposits exposes the banking system into contagion. This means that if the banks are secure from liquidity, then the financial sector is also safe. Therefore, we can say that banks responded to contagion during the financial crisis and as a result the global economy was affected (Se Hoon et.al 2008). Banks eliminate schooling problems between investors and borrowers by monitoring and ensure that depositors funds are in proper use. S econdly, they spur up economic growth. They also provide intertemporal smoothing of non-diversifiable risk at a given time as well as insuring depositors against consumption shocks. Moreover, the origin of the crisis is believed to be in U.K and in U.S. In the financial system, lenders of money embarrass households and firms while borrowers include firms, governments and households. Lenders supply funds to borrowers in two ways. To begin with, lenders supply money by means of the financial markets. Secondly, through which lenders supply money is through financial intermediaries such as the banks, mutual funds, market funds, pension funds and insurance companies. The bank relaxed the lending policies by reducing the interest rates and as a result many borrowers were attracted. In U.S mortgage lending rates were relaxed and also in U.K by the Bank of England. The housing prices rose and then began to regrets to unsustainable levels as a result of the abundant credit and as a result the housing bubble came into the scheme (Calvo 2009). The decline in the value of houses make borrowers to default their mortgage loan payment. The U.S public debt which forms 100% of its GDP was also another contributor of the financial crisis. Other countries such as Japan and chinaware run surpluses. Investigations show that many banks had an