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Course: Financial Markets 2018/07 Group 4 H Group Assignment Topic: What was the Global Financial Crisis and what were the major policy and regulation responses to it? Group Members: Fakhir Bello, Alex Kusi-Asiedu, Wisdom Courage Senyo Awuku, James Sackitey Tetteh & Darren Mills
The credit crunch of 2007/2008 primarily occurred when house prices fell and subprime
mortgage as securities defaults increased. These events caused investors to reappraise the
risks of high-yielding securities, bank failures and sharp increases in the spreads on funds
in interbank markets. That is to say, banks prior to the crunch were selling many
inappropriate mortgages to customers with low income and poor credit ratings. It was the
hope that in the booming housing market, mortgages would remain affordable and
profitable. There were lax controls on the sale of mortgage products. Mortgage brokers who
were receiving commissions for selling mortgages sold them even if they were too expensive
and had high chance of default (subprime) due to the financial incentives associated with
the selling.
In order to sell more profitable subprime mortgages, the banks as well as the other
companies engaged in mortgage selling, bundled their debts into consolidated packages
and sold them on to other finance companies as debts (mostly discounted). This allowed
mortgage companies borrow to be able to lend mortgages. These lending were not financed
out of the savings accounts of consumers i.e. the traditional banking model. The idea for the
consolidated packages was to spread the risk of lending but in effect, it spread the problem.
These Subprime mortgages had high risk rating, however due to the bundled packages; the
ratings agencies were rating the bundles as low risk, which denied the financial system the
extent of risk on their balance sheets. The mortgages had an introductory period of between
1 to 2 years of very low-interest rates meaning if consumers were to pay for the mortgage
within this introductory period, the cost of the mortgage would be very affordable. However,
mortgages are normally paid over periods longer than 1 to 2 years. This meant that after the
1 to 2 years, interest rates were increased significantly which eventually reduced the
affordability of the mortgages.
In 2007, the US had to increase interest rates because of high inflation. This made mortgage
payments much more expensive. Furtherance to that, many homeowners who had taken
out mortgages two years earlier (after the introductory period) now faced increasing
mortgage payments. Homeowners were faced with lower disposable income due to rising
health care costs, rising petrol prices, rising food prices, etc. This led to increased mortgage
defaults as it became unaffordable to homeowners to meet their mortgage obligations.

Course: Financial Markets 2018/07 Group 4 H Group Assignment Topic: What was the Global Financial Crisis and what were the major policy and regulation responses to it? Group Members: Fakhir Bello, Alex Kusi-Asiedu, Wisdom Courage Senyo Awuku, James Sackitey Tetteh & Darren Mills
These defaults ended the end of the housing prospects. Housing prices started falling which
created more problem to mortgage lenders. This resulted in institutions and consumers with
100% mortgages were faced with negative equity in that the price at the initial stage of the
mortgage had falling so low that if they decide to sell the houses, it would cost less. Mortgage
lenders as a result had no security for the loans they had advanced because the banks
could not guarantee recovery should the homeowners default the initial loan. The number
of defaults caused many medium-sized mortgage companies to go bankrupt.
These losses were not confined to mortgage lenders only many banks also lost billions of
dollars in the bad mortgage debt they had bought off mortgage companies. Banks had to
write off massive losses and this made them reluctant to make any further lending, especially
in the now risky subprime sector. The result was that all around the world, it became very
difficult to raise funds and borrow money. The cost of interbank lending has increased
significantly. Often it was very difficult to borrow any money at all. The markets dried up.
Many firms who were also exposed to the subprime lending as well as other wide variety of
firms who had difficulty in borrowing money. The slowdown in borrowing had contributed to
a slowing economy.
Policy makers internationally sought to repair the damage from the outcome of the financial
Crisis by introducing regulations both internationally and domestically. The first and one of
the most international improvements to the Financial Markets was the introduction of the
Financial Stability Board (FSB). Prior to 2007, the then ‘Financial stability Forum’ was an
informal group of regulators and central banking experts (from G20 countries) that were
meeting in Basel. After the unfolding of the Financial Crisis, they became formal in April
2009.
‘The Financial Stability Board is an international body that monitors and makes
recommendations about the global financial system. One of the most notable advancements
of the FSB was the creation of ‘Basel III’ regulation’.
Basel III was incorporated with a quantitative approach to risk profiling of institutions and a
set of supervisions used to make sure regulations are not only sustainable but also flexible
depending on the institution. A more regional approach to the Financial Crisis, namely in the

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Course: Financial Markets 2018/07 Group 4 H Group Assignment Topic: What was the Global Financial Crisis and what were the major policy and regulation responses to it? Group Members: Fakhir Bello, Alex Kusi-Asiedu, Wisdom Courage Senyo Awuku, James Sackitey Tetteh & Darren Mills
United States was the Dodd-Frank Wall Street Reform and Consumer Protection Act. This
new act was passed in July 2010 with its core component being the introduction of three
new protection bodies as follows:
? The Financial Stability Oversight Council
? The Federal Insurance Office
? The Consumer Financial Protection Bureau
The regulation of credit reference agencies a notable change in the market post crisis. The
intended effects can be viewed in two separate forms. The first form would be to create
stability through increased levels of liquidity, risk aversion and increased regulation while
also attempting to restore a level of confidence in the financial markets themselves.
One area of the aftermath left to examine was to ask the question ‘how effective have these
measures been?’

‘In particular banks can shift them around by transforming risk buckets with derivatives
(particularly CDS) to minimize their capital costs – including shifting them beyond the
jurisdiction of bank regulators – e.g. to the insurance sector in a least regulated jurisdiction.
The extent of activities in the shadow banking system also a part of the problem related to
how similar promises are treated by regulators. This issue has many implications for the
reform process.’
Seeking to repair the damage from the outcome of financial Crisis, regulations comes with
its downsides and to some extent an unintended consequences in the process of its
application.
‘When governments take regulatory actions, they focus on the particular industry they’re
trying to help. But often neighboring industries are affected in unintended negative ways.
That’s a tradeoff that is rarely considered in advance by regulators.’ Gil, an associate
professor at the Johns Hopkins Carey Business School.
Regulation is expensive – shortly after the 2008 financial crisis the IMF estimated that the
various regulations put in place would affect an increase in lending rates as follows: Europe
– 17 basis points (bps), Japan – 8 basis point (bps) and USA – 26 basis points (bps)

This meant consumers would pay between 0.08% and 0.26% more interest for credit due to
the associated regulatory costs, which are passed on to the consumer. Fewer rules means
fewer hurdles to jump to get to market with a product or service. This feature correlates with

Course: Financial Markets 2018/07 Group 4 H Group Assignment Topic: What was the Global Financial Crisis and what were the major policy and regulation responses to it? Group Members: Fakhir Bello, Alex Kusi-Asiedu, Wisdom Courage Senyo Awuku, James Sackitey Tetteh & Darren Mills
greater market participation. Greater market participation leads to increased competition
and employment. Increased competition drives down prices. Lower prices lead to savings
for consumers, which means greater spending in other areas of the economy or increased
savings. Market participants have greater flexibility in their responsiveness to changes in
the market environment. The speed at which a company can adjust to a significant
opportunity or threat is substantially different when they do not have to spend crucial time
and effort getting regulatory approval.

A financial market is a broad term describing any marketplace where buyers and sellers
participate in the trade of assets such as equities, bonds, currencies and derivatives.
Financial markets are having transparent pricing, basic trading regulations, costs, fees, and
market forces determining the prices of securities that trade. Types of financial markets are
Capital Markets where individuals and institutions trade financial securities. This type of
market is composed of both the primary and secondary markets. The other is the money
market, which is a financial market in which financial instruments with high liquidity, and very
short maturities are traded. They can be one of the following Cash or Spot, Forex and
interbank, over-the-counter Market. Productive usage: Financial markets allow for the
productive use of the funds borrowed. The enhancing the income and the gross national
production.
References
? www.fsb.org/about/ ‘About the FSB’ 2018
? www.bis.org/bcbs/publ/d307.pdf Bank of international settlements March 2017
‘Revisions to the Standardized Approach for Credit Risk
? www.imf.org/external/pubs/ft/wp/2014/wp1446.pdf International Monetary Fund,
Research Department and Institute for Capacity Development, The Regulatory
Responses to the Global Financial Crisis: Some Uncomfortable Questions, Stijn
Claessens and Laura Kodres March 2014
? https://legcounsel.house.gov/Comps/Dodd-
Frank%20Wall%20Street%20Reform%20and%20Consumer%20Protection%20Act.pdf
, Dodd-Frank Wall Street Reform and Consumer Protection Act , 21st July 2010.
? www.adb.org/sites/default/files/publication/156043/adbi-wp188.pdf ADBI Institute, The
Financial Crisis and the Regulation of Credit Rating Agencies: A European Banking
Perspective, Siegfried Utzig, January 2010
? https://en.wikipedia.org/wiki/Moody%27s_Corporation , Wikipedia, Moody’s Corporation

Course: Financial Markets 2018/07 Group 4 H Group Assignment Topic: What was the Global Financial Crisis and what were the major policy and regulation responses to it? Group Members: Fakhir Bello, Alex Kusi-Asiedu, Wisdom Courage Senyo Awuku, James Sackitey Tetteh & Darren Mills
? https://www.cnbc.com/2018/05/24/trump-signs-bank-bill-rolling-back-some-dodd-frank-
regulations.html , CNBC 24th March 2018 Jacob Pramuk ‘Trump signs the biggest
rollback of bank rules since the financial crisis’.
? http://www.gem.sciences-
po.fr/content/publications/pdf/Blundell_Atkinson_Thinking_Beyond_Basel_III062010.pd
f , THINKING BEYOND BASEL III: NECESSARY SOLUTIONS FOR CAPITAL AND
LIQUIDITY , Adrian Blundell-Wignall and Paul Atkinson, OECD Journal, Financial Market
Trends 2010 Issue 1
? Liquidity Risk and the Credit Crunch of 2007-2008: Evidence from Micro-Level Data on
Mortgage Loan Applications by Adonis Antoniades
? Federal Reserve Bank of St. Louis Review, September/October 2008, 90(5), pp. 531-67.
? https://www.economicshelp.org/blog/706/economics/essays-on-the-credit-crunch/