The Regulatory Crisis

Question 1

The huge driver..

Answer 1

Us housing market

Up to July 2006, house prices were rising. Market was showing all classic signs of a financial bubble

Fed by the us banks which were lending more and more whilst applying weaker and weaker lending criteria to less creditworthy customers

Question 2

What were the 3 immediate causes of the crisis?

Answer 2

Financial liberalisation

Monetary policy

Regulatory failures/lapse

Question 3

Financial liberalisation meant that…

Answer 3

It was easier for banks to lend and individuals to borrow I.e. Asset backed securities and sub prime lending

Question 4

Monetary policy focussed on …

Answer 4

Inflation in goods and service prices

Ignored

Asset price inflation

Didn’t respond to rapid rise in house prices in most countries

Question 5

Regulatory failures meant that…

Answer 5

Banks relied too heavily on wholesale funds to aggressively expand their balance sheets

Borrowing short and lending long

Question 6

Encouraged by financial innovation and initiatives…

Answer 6

Dangerous and Ill informed practices

And

Political initiatives to encourage home ownership for most citizens

Large volumes of lending to less than creditworthy borrowers

Dilution of professional standards

Question 7

Sub prime house loans were…

Answer 7

Packaged and sold to financial institutions

Resultant debt packaged into spvs and sold on to other countries. Highly reputable banks so everyone thought it was fine . But toxic debt

Question 8

What does Flaw stand for

Answer 8

Financial liberalisation

Leverage increases

Asset price inflation

Wholesale funds