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

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

The financial crisis – How did it happen? A deeper recession emerged as a result of high interest rates People struggled to pay their mortgages – house prices fell A mild recession – higher unemployment and high inflation Economic recovery A flexible labour market triggered a fall in unemployment Primary economic objective No more boom and bust! Strong economic growth – cheap credit is more readily available and reduced regulations on mortgage lending 1997 – Bank of England becomes independent and controls interest rates UK banks jump on the lending frenzy sub-prime customers defaulted on their mortgages – house prices plummeted 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 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. Downturn and recession… Austerity The debts were so large that only governments could absorb them. Many banks were bailed out (given cash) or nationalised.

What could they have done differently? Who was to blame? The financial crisis was caused by a culmination of bad decisions made by individuals, organisations, institutions and governments. 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.