Italian Financial crisis Research Paper Example | Topics and Well Written Essays - 1500 words

Italian Financial crisis - Research Paper Example This paper aims to discuss the financial crisis in Italy. The collapse in 2008 of Lehman Brothers represents Italy’s economic emergency starting point. During the financial crises, initial stages, Italian investors and banks had suffered minimally. America’s housing market issues had as of yet to hit Italy. Financial institutions in Italy were not in possession of sub-prime bonds in large quantities. The collapse of Lehman Brothers started what was the most dramatic of phases via contracting interbank loan markets. Due to a shortage of liquidity and doubts on the borrower’s financial soundness, banks stopped lending each other money. Governments induced by the liquidity crisis lent loan support to national banks while the ECB lowered the rate of discount. Banks, however, reduced access of credit for clients in order to regain liquidity. At this point, the Italian economy became entangled in the crisis. Large banks are not many in Italy, with most operating on the regional scale (Silvia & Hana 50)1. The crisis affected these larger banks, Lehman Brother’s collapse resulting in them losing funds and from the devaluation of their assets due to the collapse of the stock market. The biggest problem, which Italian banks faced was due to its links with Eastern and Central European countries (Organization for Economic Cooperation 15)2. Since the early 90s, banks extended their branch networks to countries, which had been candidates for EU membership and Ukraine. The risk of imminent collapse in this region caused the banks to lose value on their shares due to doubts about its solidity financially. Government support helped avoid a crisis. Medium and small size banks, however, reacted via reduction of credit to consumers and clients and increasing collateral for new loans. This, in turn, caused a reduction house and machinery