Finance Markets and Risk Essay Example | Topics and Well Written Essays - 2500 words

Finance Markets and Risk - Essay ExampleThe intention of this study is systemic risk that is ushered by unforeseen incidents that add uncertainty unimaginably and damage the liquidity of the market at a rapid phase. Illiquidity results in prices gaps in respective markets and in the pricing of a extra asset. The related pressure later extends to the liquidity of funding of fiscal institutions around the world that are assisting those independent markets. Illiquidity in markets sequentially can result in potentially momentous real economic impacts, thus warrant policy action, particularly by central banks. As per IMF (International M nonpareiltary Fund), BIS (Bank for International Settlements) and FSB (Financial threadbare Board), systemic financial risk is one, which is associated with the peril of risk of disruption to financial services that (a) is happened by a destruction of completely or parts of the financial system and has the probable to sire the worst negative outcome for real economy. During September 2008, AIG borrowed from the Federal Reserve System an $85 billion two-year loan that too at a penalty rate, which has been termed as ever known the deport of one of the globes major insurers. In return for the rescue operation, Fed received a 79.9% of shares in the AIG. At the time, the investment banking arm of AIG retrieveed a systemic risk emanating from its credit default swap (CDS) business. The failure of one firm may not impact its rivals as is happening in the most sectors of the economy nor does it result in market failures. However, in the financial sector, there is an impending peril that the breakdown of any major financial market or institution may result in the adverse impacts on the whole financial system more likely. In several associated channels, such systemic risk can be in operation, if there is a mishap in a specific financial institution. All the depositors of a bank will be in panic and will rush to get back their deposit s when the depositors put down their trust, if a typical bank run occurs. The banking system of a nation as a whole may be in jeopardy if hearsay spreads about the fate of the remaining banks of a nation. The bank runs vulnerability can be a reality typically as there will be a maturity mismatch between their assets and liabilities. The banking system might have invested in long-term debts like loans to households and businesses, whereas they might have accepted deposits from their customer on the demand basis. Even a healthy bank may have chance to witness a bank run despite the fact that its assets would have more value than its liabilities, but a credit crunch may occur if there is premature withdrawal of deposits suddenly by bank customers. Thus, raze a solvent bank can witness a liquidity crunch, despite the fact that the liquidity issues may mirror concerns about banks solvency. However, there are some risk-aversion strategies, which are in place like lender-of-last-resort f acilities and deposit insurance, which make the possibility of bank run as a mirage. short-term deposits are available from one bank to another bank through interbank transactions, and this occupies sizeable quantum of their business transactions. However, at times of liquidity crunch, associations between banks may witness jolts to proliferate through the system. For instance, Barclays bank has provided short-term credit to ANZ bank, then, concerns of default by ANZ bank might jeopardise to the stability of Barclays bank. Such similitude vulnerabilities are regarded to be one of the main causes why the alarm can spread between banks in such scenarios. In such situations, inter-banking lending will come to a halt due to