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

2. Causes of the financial crisis
What was the 2008 financial crisis all about?
How did it happen?

3. 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.

4. 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.