Contents

What is Financial Crisis?..............................................................................................................................2

What Causes a Financial Crisis?...................................................................................................................2
Different Financial Crisis in last 50 years.....................................................................................................2
Global Financial Crisis – 2007 to 2008.........................................................................................................2
Why was the crisis caused?.....................................................................................................................3
Subprime mortgage bubble.....................................................................................................................3
Banking crisis...........................................................................................................................................3
Consequences..........................................................................................................................................4
Financial Crisis – 2008 to 2009 (Great Recession).......................................................................................4
How did it get So Bad?.............................................................................................................................4
The Housing Market Declined.............................................................................................................5
The Credit Well Dried Up.....................................................................................................................5
Costs of the Great Recession...................................................................................................................5
Conclusion...................................................................................................................................................5

What is Financial Crisis?

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In a financial crisis, asset prices see a steep decline in value, businesses and consumers are unable to pay
their debts, and financial institutions experience liquidity shortages. A financial crisis is often associated
with a panic or a bank run during which investors sell off assets or withdraw money from savings
accounts because they fear that the value of those assets will drop if they remain in a financial
institution. Other situations that may be labeled as a financial crisis include the bursting of a speculative
financial bubble, a stock market crash, a sovereign default, or a currency crisis. A financial crisis may be
limited to banks or spread throughout a single economy, the economy of a region, or economies
worldwide.

What Causes a Financial Crisis?

A financial crisis may have multiple causes. Generally, a crisis can occur if institutions or assets are
overvalued, and can be exacerbated by irrational or herd-like investor behavior. For example, a rapid
string of selloffs can result in lower asset prices, prompting individuals to dump assets or make huge
savings withdrawals when a bank failure is rumored.

Different Financial Crisis in last 50 years

 LatAm sovereign debt crisis – 1982
 Savings and loans crisis – 1980s
 Stock market crash – 1987
 Junk bond crash – 1989
 Tequila crisis – 1994
 Asia crisis – 1997 to 1998
 Dotcom bubble – 1999 to 2000
 Global financial crisis – 2007 to 2008

Global Financial Crisis – 2007 to 2008

The financial crisis of 2007–08, also known as the global financial crisis and the 2008 financial crisis, was
a severe worldwide economic crisis and many economists consider it to be the most serious financial
crisis since the Great Depression of the 1930s, to whom it is often compared.

The crisis began in 2007 with a downfall in the subprime mortgage market in the United States, and
developed into a full-blown international banking crisis with the collapse of the investment bank
Lehman Brothers on September 15, 2008. Excessive risk-taking by the banks such as Lehman Brothers
helped to magnify the financial impact globally. Massive bail-outs of financial institutions and other
palliative monetary and fiscal policies were employed to prevent a possible collapse of the world
financial system. The crisis was followed by a global economic downturn, the Great Recession. The Asian
markets (China, Hong Kong, Japan, India, etc.) were immediately impacted and volatilized after the U.S.
sub-prime crisis. The European debt crisis, a crisis in the banking system of the European countries using
the euro, followed later.

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Why was the crisis caused?
 widespread failures in financial regulation, including the failure of Federal Reserve to stem the
tide of toxic mortgages
 An explosive mix of excessive borrowing and risk by households
 key policy makers ill prepared for the crisis, lacking a full understanding of the financial system
they oversaw, and
 Systemic breaches in accountability and ethics at all levels.

Subprime mortgage bubble

The precipitating factor for the Financial Crisis of 2007–2008 was a high default rate in the United States
subprime home mortgage sector, i.e. the bursting of the "subprime bubble". This happened when many
housing mortgage debtors failed to make their regular payments, leading to a high rate of foreclosures.
While the causes of the bubble are disputed, some or all of the following factors must have contributed.

 Low interest rates encouraged mortgage lending.

 Securitization. Many mortgages were bundled together and formed into new financial
instruments called mortgage-backed securities, in a process known as securitization. Because
mortgage lenders could pass these mortgages (and the associated risks) on in this way, they
could and did adopt loose underwriting criteria (due in part to outdated and lax regulation).
 Lax regulation allowed predatory lending in the private sector, especially after the federal
government overrode anti-predatory state laws in 2004.
 The Community Reinvestment Act (CRA), a 1977 US federal law designed to help low- and
moderate-income Americans get mortgage loans encouraged banks to grant mortgages to
higher risk families.
 The accumulation and subsequent high default rate of these subprime mortgages led to the
financial crisis and the consequent damage to the world economy.

Banking crisis
High mortgage approval rates led to a large pool of homebuyers, which drove up housing prices. There
was high devaluation of financial instruments (mortgage-backed securities including bundled loan
portfolios, derivatives and credit default swaps) due to which the market (buyers) for these securities
evaporated and banks who were heavily invested in these assets began to experience a liquidity crisis.

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Lehman Brothers filed for bankruptcy on September 15, 2008. Merrill Lynch, AIG, HBOS, Royal Bank of
Scotland, Bradford & Bingley, Fortis, Hypo Real Estate, and Alliance & Leicester were all expected to
follow. In spite of trillions paid out by the US federal government, it became much more difficult to
borrow money. The decrease in buyers caused housing prices to decrease rapidly.

Consequences
While the collapse of large financial institutions was prevented by the bailout of banks by national
governments, stock markets still dropped worldwide. In many areas, the housing market also suffered,
the crisis played a significant role in the failure of key businesses, declines in consumer wealth estimated
in trillions of US dollars, and a downturn in economic activity leading to t he Great Recession of 2008–
2009 and contributing to the European sovereign-debt crisis.

Declines in credit availability damaged investor confidence and affected global stock markets, where
securities suffered large losses during 2008 and early 2009. Economies worldwide slowed during this
period, as credit tightened and international trade declined.

Financial Crisis – 2008 to 2009 (Great Recession)

The Great Recession is the name commonly given to the 2008 – 2009 financial crisis that affected
millions of Americans. In the last few months there were several major financial institutions be absorbed
by other financial institutions, receive government bailouts, or outright crash.

How did it get So Bad?

The American economy is built on credit. Credit is a great tool when used wisely. For instance, credit can
be used to start or expand a business, which can create jobs. But in the last decade, credit went
unchecked in our country, and it got out of control.

Mortgage brokers, acting only as middle men, determined who got loans, then passed on the
responsibility for those loans on to others in the form of mortgage backed assets (after taking a fee for
themselves originating the loan). Thousands of people took out loans larger than they could afford in the
hopes that they could either flip the house for profit or refinance later at a lower rate and with more
equity in their home.

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A lot of people got rich quickly and people wanted more. Before long, all you needed to buy a house was
a pulse and your word that you could afford the mortgage. Brokers had no reason not to sell you a
home. But many of these mortgage backed assets were ticking time bombs. And they just went off.

The Housing Market Declined

Individuals and investors could no longer flip their homes for a quick profit and mortgages no longer
became affordable for many homeowners, and thousands of mortgages defaulted. This caused massive
losses in mortgage backed securities and many banks and investment firms began bleeding money.

The Credit Well Dried Up

These massive losses caused many banks to tighten their lending requirements, but it was already too
late for many of them, the damage had already been done. Several banks and financial institutions
merged with other institutions or were simply bought out.

Costs of the Great Recession

A lot of the cost of the Great Recession is found in the loss of wealth. For many people, this loss of
wealth came largely through falling home values. The number of home owners who suddenly found
themselves underwater with their mortgages was huge.

Another consideration is the drop in wage income. The Great Recession prompted cutbacks at many
companies. Even if you didn’t lose your job, there’s a possibility that your hours were cut, or that you
lost some benefits. Underemployment is, perhaps, a lesser problem than unemployment, but it’s still a
problem.

Conclusion
In our opinion these crisis which occurred in last 50 years were due to economic system failure. Banking
system collapsed due to instability. Most of world’s economic growth was in USA and it moved gradually
towards depression due to bubble of real estate industry. Slow economic recovery from this crisis in the
world was due to diverse economic policies made to have economic growth. The financial institutions all
across USA were almost independent from any regulatory authority, so they did not follow the
monetary and fiscal policies of the country. They made impact on the system and led it to depression
and failure. The depression caused butterfly effect all across the continents. The timing of this
depression varied from place to place.

Major failures include weak regulations (Financial as well as government) and weak allocation of
resources in a sense that there were no restrictions on buying houses, people who could not even afford
to purchase more houses keep on purchasing them with a view of reselling them for profit, that’s why
the financial crisis was the result of failure of economic system.