Question

I am doing an analysis of an English investment bank during the Global Financial Crisis and have analysed their balance sheet values. It was found that they increased their derivative financial assets from 20% to 48% (from 2007 and 2008) and subsequently increase derivative financial liabilities from 20% to 47% (2007 and 2008 values).

I am curious in knowing what this means for the bank. Does the reduction in other values such as loans, trading portfolio assets, and other assets and an increase in derivative financial instruments show a hedge to protect the bank from risk? What would be the purpose of a bank decreasing other assets and significantly increasing derivative financial instruments during the GFC?

Thank you.

Answer 1

The financial crisis of 2007–2008, also known as the global financial crisis and the 2008 financial crisis, is considered by many economists to have been the most serious financial crisis since the Great Depression of the 1930s.

It began in 2007 with a crisis in the subprime mortgage market in the United States, and developed into a full-blown international banking crisis with the collapse of the investment bank Lehman Brothers on September 15, 2008. Excessive risk-taking by banks such as Lehman Brothers helped to magnify the financial impact globally.

The purpose of bank decreasing the assets and increasing derivative financial instruments as fed was increasing the rates.