Global Financial Crisis

Abstract

Many have suggested that the Global Financial Crisis was an accident waiting to happen, being the result of trends dating from the 1970s. However, these same trends provided the global financial system with a high degree of resilience. The depth and breadth of global financial markets, the size and scale of the megabanks, and the use of derivatives, all provided a means of coping with the instabilities inherent in market economies. In addition, central banks, acting collectively, had perfected rules of behaviour that were applied to systemically important banks and so reduced the level of risk that they were exposed to. Securitization and the operation of the originate-and-distribute model of banking had removed the threat of a liquidity crisis. Regulatory agencies were also in place that supervised financial systems, and so were in a position to identify and deal with any signs of impending difficulty. This removed the threat of a solvency crisis for any systemically important institution. Under these circumstances a crisis of the magnitude of the one that took place in 2008 was considered impossible. But the impossible happened. However, the crisis was a rolling affair, beginning in 2007, creating ample opportunity for intervention to prevent it having the consequences it did.