In the case of “the Technology Equity Price Bubble”, due to the low interest rate in 1998-1999 and the rapid growth of the internet sector, those Web technology-related companies (dot-com companies) were very attractive for the investors, these dot-com companies relied on the venture capital and initial public offerings to cover their expenses at the early stages of their business to build potential market share, and also investors were willing to invest in them because of the low interest rate and rapid growth of this field, hence massive investment were injected into this field. However, U.S. Federal Reserve increased interest rate repeatedly in early 2000 which caused the reduction in investment and the burst of dot-com bubble, those dot-com companies could not even make through the loss stage and then stopped trading after the investment ran …show more content…
Cabral (2013) argued that “the increase in financial leverage was possible due to misguided changes in the regulatory framework, specifically, the Basel I capital accord and reductions in reserve requirements.” One of the indicators of financial crisis I mentioned above is excess of leverage, Basel I rule, in simple words, classified bank’s assets into five groups and requires bank to maintain capital equal to at least 8% of its risk-weighted assets. However, the Basel I rule created incentives for banks to acquire high default and liquidity assets that met the requirement for low risk-weights, and it allowed banks to have higher leverage and reduced the minimum capital ratio requirement. (Cabral, 2013) This indicates that the changes in regulatory framework might significant affect the capital management system of banks, and then cause excessive leverage or liquidity. In conclusion, the two main indicators of financial crisis are excessive leverage and liquidity in the financial market, combined with other factors such as the changes in interest rate and level of the country’s current account deficit. On the other hand, we should also pay attention to the changes in the regulatory framework that might misguide the financial