US Financial Crisis - The Cause

The cause of the global financial market crisis was a major US housing boom which came to an eventual end with financial institutions incurring significant losses on mortgages and mortgage related assets.

The global credit boom was characterised by a broad underpricing of risk, excessive leverage of financial institutions and increasing reliance on complex and opaque financial instruments which proved to be fragile under stress.Essentially, there was a failure to regulate and supervise the quality of new mortgages being issued in the USA. Various originators and distributors of mortgage debt used creative approaches to fool large institutional investors by obscuring the significant risks involved while over-emphasising the high returns.

The lending proved to be loss making or entailing high risk of loss. A significant part of US mortgages issued in recent years was “toxic” and was sold around the world with ramifications for banking behaviour everywhere.

Hardly any bank is willing to lend to another bank anymore, especially when it involves the exchange of securities, which has been a pillar of inter-bank lending.