ICELAND'S FINANCIAL CRISIS Case Study Example | Topics and Well Written Essays - 2000 words

ICELANDS FINANCIAL CRISIS - subject Study ExampleDuring this time gunpoint, home determines began to fall dramatically and sub-prime rates eventually readjusted so that individuals owed up to double their original mortgage value on homes that were no long-lasting even value their original trade value. A vast variety of the sub-prime mortgages offered to individuals who actually did not maintain quality resources to begin an adjustable home loan interest rate were suddenly forced into foreclosure, which left lending institutions with a meaningful inventory of now bank-owned homes worth less than their mortgage values at the time of signing. As the housing bubble burst and grew more fiscally unsound, global investors found that the many derivatives (swaps) associated with home mortgages were no longer viable and lucrative opportunities for investing (Simkovic, 2011). Many investors from the European Union and the United States began looking for punter investment opportunities, leaving financial institutions offering these derivatives with considerably less quarterly and annual revenues stemming from mortgage-backed swaps and securities. Because mortgage- cerebrate derivatives were, for many years, comme il faut and lucrative profit opportunities for financial institutions, many offering these securities backed by mortgage guarantees had not modify their revenue-earning capacities. As such, investment trading partners in the United States witnessed capital depletion rapidly where many institutions required significant fiscal bailouts to keep the entity afloat. Further complicating this situation was what is referred to as a bank run, where nearly five one million million dollars in investment resources were withdrawn domestically and internationally in a 48 hour period by concerned and speculating investment firms and in hooklike investors (Altman, 2009). Low-valued credit default swaps, a variety of mortgage related derivatives, and banking facility c apital depletion soon hit Iceland and many other European countries. Iceland, after banking privatization had been established, was very dependent on making investments in international capital markets (Olsen, 2010). However, this instability and credit downgrading that occurred during the sub-prime crisis in the U.S. had destabilized multiple investment opportunities associated with mortgage-backed securities and derivatives. Thus, a once lucrative revenue source for Icelandic banks and other financial institutions no longer provided adequate capital infusion for the now-private banking facilities in the country. Since there had not been enough portfolio diversification in Iceland to incite domestic investment opportunity to offset dependencies on international investment losses, the exchange rate of the Icelandic currency value was affected and derivatives relationships with foreign banking partners were largely nullified. As the IMF and the U.S. Central Bank began changing mone tary policy and increasing regulation to correct the sub-prime crisis, it inflated the U.S. dollar which only served to further weaken the value of the Iceland currency on the international exchange markets. How could the Iceland Crisis draw been Avoided? Firstly, Iceland should have recognized that the U.S. would not necessarily have explosive gains on mortgage-related securities and derivatives that would endure indefinitely. The U.S. had a long history of a volatile housing market which should have provided adequate