FIN200 Individual Assignment, T1 2020 Explain and discuss the possible causes of the XXXXXXXXXXglobal financial crisis. Discuss whether you think the GFC could be repeated. Explain the scale and...

FIN200
Individual Assignment, T1 2020
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Table of Contents
Introduction    3
Causes of the GFC    3
Impact of GFC on Major Global Economies    5
Europe    5
Australia    5
Measures in response to the GFC    6
Yield Curve    7
Categories of Yield Curves    7
Conclusion    9
References    9
Introduction
The global financial crisis (GFC) of 2009-2009 was the most badly affecting financial crisis after the Great Depression that happened during the 930s. According to Atkinson, Luttrell, and Rosenblum (2013), the estimate of the impact was almost $14 trillion. A credit crunch which began in the summer of 2006 culminated with the burst of the housing market bubble. According to Benmelech and Dlugosz (2009), many structured financial securities were downgraded 5-6 grades. The largest mortgage lending company in the U.S., IndyMac, along with Freddi Mac and Fannie Mae began to be controlled by the government. The biggest shock was Lehman Brothers one of the largest investment banks filed for bankruptcy in September 2008-such was the impact of the crisis. Nine major banks received liquidity worth $250 billion injected by the U.S. Treasury by mid-October 2008. The crisis rolled on to 2009. By October 2009 the unemployment rate in the United States spiked up to 10%.
Causes of the GFC
Political factors: According to Rajan (2010), deficiencies in the educational structure gave birth to inequities in access to various economic spheres of society in the Unites States. Politicians proposed that widening the scope of mortgage loans provided by banks would bridge the gap. Underwriting standards were made less stringent and the target customers for mortgage was extended widely. Increased demand for houses drove prices up, but at the cost of increased risk associated with mortgage lending
Growth of securitization and OTD: According to an empirical study by Maddaloni and Peydro (2011), “easy money” policy resulted in low interest rates in the short-term leading to relaxed standards of business and housing loans. This was aided by weak bank supervision and a securitization model called originate-to-distribute (OTD), making it cheaper for banks to make credit standards less stringent, perform less screening, and offer riskier loans, this increasing the systemic risk, according to Cortes and Thakor (2015). Increased flow of credit into the housing market resulted in total loan originations rising to $2.4 trillion in 2007 from $500 billion in 1990 with mortgage loans outstanding increasing to $11.3 trillion during the same period.
Financial Innovation: The financial market industry is highly competitive with the best financial institutions offering similar or standard financial products and so it is very difficult to outperform one another and achieve high profit margins. According to Puri, Rocholl, and Steffen (2011), this encouraged financial institutions to come up with innovative product offerings but innovation comes with increased risks. And subsequently, according to Gennaioli, Shleifer, and Vishny (2012), when there is a disagreement among the funding institutes on the creditworthiness of the new products, short-term funding is unlikely to be rolled over. This would give rise to a financial crisis. The inherent complex nature of the immature products confused investors and regulators and obscured the risks or market transactions.
Monetary Policy: According to Taylor (2009), the Federal Reserve instituted a monetary policy in the period leading to the crisis aided the easy money policy in the price boom. The Federal Reserve chose unprecedented low interested rates as a deliberate policy which hastened the housing boom by making loans more cheap and accessible by a wider population. The housing bubble was there and would not have been visible had there been no bubble to burst and give rise to the crisis. The situation was worsened by implementing the practice of offering incentives to bankers for closing out on low-interest mortgages making them ever so risky.
Lack of Accountability in Mortgage Business- Apparently people who were selling the risky instruments like mortgages and bad securities did not have fear as they believed that they would not be held responsible or accountable if anything goes wrong. A lender would sell risky mortgages without any fear of repercussions. The only motive here would be to maximize individual gain and passing down the problems until the problem became big enough to collapse the system as a whole. This could only be possible due to the lack of accountability.
Shadow Banking System: regulated banks once oversaw risky financial activities but they slowly migrated outside the regulations of the government. This is very true about mortgage lending as it gradually came out under the shadow of unregulated institutions. According to Ivashina and Scharfstein (2010) Repo liabilities or collateralized deposits of U.S. broker dealers saw a dramatic increase in the four years before the crisis. One type of collateral was mortgage backed securities (MBS). With subprime mortgage underwriters going bankrupt at an increasing rate, there were significant downgrades of MBS by the rating agencies in mid-2007. This badly impacted the near-term borrowing capability in the shadow banking sector by a substantial degree.
Off-Balance Sheet Financing: Off-the-book accounting standards such as special purpose entities like structured investment vehicles (SIV) were created by the banks to facilitate risky investments by making more loans to expand, but at the cost of creating contingent liabilities. This reduced the perceived creditworthiness of the banks and allowed them to have less capital reserve against.
Government-Mandated Subprime Lending: It was mandated by the Federal Government by the Community...