On February 8, 2007, the HSBC Holdings Plc., Europe’s biggest bank, announced 20% more loan losses in 2006 than analysts estimated, blaming the deteriorating U.S. subprime mortgage business. Since then, a constant stream of press reports was released about the huge losses in worldwide mortgage lending and downturns of other institutions exposed to this market. With the financial contagion throughout the global economy, the US subprime mortgage-lending crisis has led to a global financial crisis. Up to 465 failed banks were closed by the Federal Deposit Insurance Corporation (FDIC) from 2008 to 2012, along with world famous investment banks ‘being acquired by commercial banks or converted into bank holding companies’ (S. Valdez and P. Molyneux, 2010). Meanwhile, some major banks in the U.K and Europeans reported banking runs or even demise during the years. Witnessing the worst worldwide devastation since 1920s, intense discussions are aroused on major causes of the financial crisis and effective solutions to recover.
2. Main causes of the financial (and banking) crisis
3.1 Macroeconomic factors
‘While the proximate causes of the crisis lie within financial markets, the build-up of substantial global macroeconomic imbalances and low interest rate over the past decade may also have contributed significantly’ (M. Astley et al, 2009). Global capital flows have been characterized as imbalance in recent years: capital flows are continuously pushed from the emerging economies (Asia and oil exporters, EEs) toward advanced economies (especially the U.S., AEs), due to improving growth performances of some developing countries compared with a long-term deficits in capital-rich industrial counterparts (Figure 1.1). Not like the inspiring surpluses in EEs, there is a dearth of domestic investment opportunities. For instance, social securities polices are relatively restrict and the domestic rate of return is lower than abroad. Some EEs with high savings therefore, tend to direct invest their savings to more mature financial market in developed countries, like the U.S. and U.K. Figure 1.1
(percent of world GDP)
From International Monetary Fund, World Economic Outlook: Recovery, Risk, and Rebalancing, World Economic and Financial Surveys, Washington, DC, 2010, p. 29. Figure 1.1
(percent of world GDP)
From International Monetary Fund, World Economic Outlook: Recovery, Risk, and Rebalancing, World Economic and Financial Surveys, Washington, DC, 2010, p. 29. As a result of global capital flows and other factors, like exchange rate influences or domestic loose monetary policy, saving rates in deficit countries stayed falling in recent years. Giving the different saving and investment patterns in different regions (Figure 1.2), demands for credit continuing increased, founding the global credit boom. Investors and other institutions are also encouraged to finance risky products contributed to the low interest rate environment. Combined with the global financial imbalance with long-term low interest rate, the amount of capital inflows to deficit countries kept boosting until it was too much to afford. In consequence of close global interaction, when the subprime market of America, the major receiving country of the ‘global saving glut’, collapsed in mid-2007, the global financial (and banking) crisis unfurled. The links between the global macroeconomic environments with the financial crisis is complex, though. The main factors, that fueled instead of triggered the financial market earthquake, could be concluded as global interest rate fall and credit expansion contributed by the worldwide capital imbalance in a globalisation background.
3.2 Microeconomic factors
When it comes to microeconomic factors, a range of causes led to more direct influences on financial market and banking system. Figure 1.2
Saving and investment...