Why did global financialinstitutions fail to predict the Global Financial Crisis of 2007-9? Whatrecommendations would you make to strengthen the global financial architectureto prevent future...

Why did global financial institutions fail to predict the Global Financial Crisis of
2007-09?
The Financial Institutions failed to predict the Global Financial Crisis, Because of their
failure to recognise the Systematic Risk at the international level. The four essentials for
understanding the reasons can be explained as under:
First, shadow banking system’s phenomenal growth mainly of the investment banks
and other financial institution that were freely operating in capital markets beyond the
reach of the regulations and that had been put in place in the wake of the crash of 1929
and the Great Depression. With the introduction of this system, the trational banks were
threatened and hence, took their grievances to their regulators and to Congress. Such
regulators and congress slowly and steadily removed long-standing restrictions and in
turn, helped the banks to break out of their traditional mold and join the feverish
growth. Two parallel financial systems of enormous scale resulted from the above. Not
only Wall Street, but many americans were benefited because of this new competition,
since, the costs of their mortgages lowered and the returns on their 401(k)s increased.
Shadow banks and commercial banks were codependent competitors. Though their
new activities were very profitable but were at the same time very risky.
Second- the evolution of financial regulation. The new dual system that granted greater
license to market participants appeared to provide a safer and more dynamic
alternative to the era of traditional banking to the Federal Reserve and other regulators.
Regulators labelled the financial institutions as “deregulation”. In the Fed view, if
problems emerging in the shadow banking system could provide a vital support to the
large commercial banks, which were assumed to be well-capitalised, porperly runned,
and well-regulated despite of the fact that they are loosing their restraints. And
understandably, country assumed that the Fed could always and would always save
the day.
Third – Mortgage Industry’s insightful and profound changes - from the old era when
the local lenders were fully responsible for making and servicing the 30-year loans to a
new era in which the main objective was just to sell the loans off at the earliest, so that
they could be packaged and sold to investors around the world. New mortgage
products and the borrowers both proliferated. Inevitably, this created a market in which
the participants had higher stake in the quantity of mortgages signed up and sold rather
than the quality of the mortgages made. The participant of the market are namely,
mortgage brokers, lenders, and Wall Street.
Fourth- structured finance, securitization and derivatives, these are the words that
entered the national vocabulary as the financial markets unraveled through 2007 and
2008. Simply saying, and most pertinently, the mechanism of the structured finance
was the reason by which subprime and other mortgages were turned into complex
investments often accorded triple-A ratings by credit rating agencies. The complete
market depended on finely honed computer models—which turned out to be divorced
from reality and on ever increasing housing prices. With bubble burst, the securities
which were backed by mortgages, were the first dominoes to fall in the financial sector.
The above four matters are the major reasons for the systematic risk, that these financial
Institutions failed to predict and hence, failed to predict the global Financial Crisis.
What recommendations would you make to strengthen the global financial
architecture to prevent future crises?
The term GFA means safeguarding or protecting the functioning of the global monetary
and financial systems with the help of the collective governance arrangements at an
international level. Since 1971, when Bretton Woods’s system of administered exchange
rates collapsed, the inadequacies of GFA are a major concern. After the last major
financial crisis, the Asian crisis of 1997-1998, there was a similar intensification of the
debate on the GFA (e.g. Pack, 2000). But there was little substantial progress after 1997-
98, as the occurrence of the 2008 financial crisis implies. There were incremental
changes to the GFA and disparate region efforts to come...