BNK603 Assignment

Topic- Global Financial Crisis

Question 3

State and explain the five factors that had caused the financial crisis.

1. Excessive risk taking in a favourable macroeconomic environment.

Economic circumstances in the US and other nations were favourable in the years before Global
Financial Crisis. Strong and consistent economic growth was accompanied by low rates of
unemployment, inflation and interest. In this setting house prices were growing strongly.

Due to continuous rise in house prices in United States, people carelessly started to take loans in
order to purchase or build houses.

2. Increased borrowings by banks and investors.

Up until the Global Financial Crisis, banks and other investors in the US and other overseas
countries borrowed more money to increase their lending and buy Mortgage Backed Securities
(MBS).

Leveraging up is borrowing money to buy an asset which increases the potential for gains while
also increasing the possibility for losses. As a result of taking on so much debt, banks and
investors suffered significant losses as housing values started to collapse.

3. Regulation and policy errors

There was insufficient regulation of MBS products and subprime lending. Particularly, the
institutions that produced and offered investors sophisticated and opaque Mortgage Backed
Securities were not sufficiently regulated. Fraud was becoming more prevalent, including
overstating of borrowers’ income and over- promising investors on the security of the MBS
products that were being sold. Numerous borrowers received loans that were so sizeable that
they had little chance of repaying them.

4. Complex Financial Products

Investors and regulators found it challenging to understand and control the risks in the financial
system due to the usage of complicated financial products like credit default swaps and
collateralized debt obligations.

5. Repeal of Glass- Steagall Act

The Depression-era Glass-Steagall Act (1933) was partially repealed in 1999, allowing banks,
security firms, and insurance companies to enter each other's markets and merge, leading to the
formation of banks that were "too big to fail" (i.e., so large that their failure would endanger the
stability of the entire financial system

Bibliography
Causes of the Global Financial Crisis. (2023, January 15). Retrieved from Tutor2U:
https://www.tutor2u.net/economics/reference/financial-economics-causes-of-the-global-
financial-crisis

Australia, R. B. (n.d.). The Global Financial Crisis. 1-4