Causes of the financial crisis

CISI – Financial Products, Markets & Services
Topic – Introduction to financial services
Causes of the financial crisis

Causes of the financial crisis

https://www.youtube.com/watch?v=v5Veyepqvfk
What was the 2008 financial crisis all about?
How did it happen?

The financial crisis – How did it happen?

Economic recovery
Primary economic objective
No more boom and bust!
1997 – Bank of England becomes independent and controls interest rates
A mild recession – higher unemployment and high inflation
A deeper recession emerged as a result of high interest rates
People struggled to pay their mortgages – house prices fell
A flexible labour market triggered a fall in unemployment
Strong economic growth – cheap credit is more readily available and reduced regulations on mortgage lending
UK banks jump on the lending frenzy
US banks take bigger risks lending to
Sub-Prime customers
sub-prime debt was packaged up into collateralized debt obligations (CDO) and sold to investors
sub-prime customers defaulted on their mortgages – house prices plummeted
Homeowners still paying their mortgages faced negative equity – defaults increased
Investment banks and investors were sitting on a large number of worthless assets.
Nobody knew who was holding these toxic (bad) debts. Lending stopped taking place and bankruptcies started to increase.
The debts were so large that only governments could absorb them. Many banks were bailed out (given cash) or nationalised.
Downturn and recession…
Austerity

Who was to blame?

Participant	What could they have done differently?
Money Lenders (High Street Banks)	Tougher lending criteria (Higher deposits required) Been more constrained with lending
Investment Banks	Been more responsible with their attitude towards risk
Regulators	Tougher regulations required.
Bank of England	Campaigned for more action when the housing bubble began to expand. Been quicker to act when the crisis began – pumped money into the economy sooner.
Government	Given encouragement for greater regulation. US Government should have avoided encouraging sub-prime mortgage lending
Borrowers (The public)	Ensured they live within their means – do not spend what you do not have.
US Lenders and Investment Banks	Been more selective about who money was leant to.
Investors	Been more aware of the risks they were taking. Been more selective about how they invested their money.

The financial crisis was caused by a culmination of bad decisions made by individuals, organisations, institutions and governments.