The St. Louis Fed On The Economy Blog had an interesting article today, looking at why the GFC happened, and how the Dodd-Frank Act has addressed the issues in the US (yes, the one which may be repealed if Trump gets his way).
But, look at the issues in the Australian context and score for yourself to what extent we currently have the same issues here as they did in the US then. Its scary!
A number of observers have questioned whether bank regulators could have prevented the financial crisis of 2008. While many market participants recognized the exuberance of the housing market, other factors contributing to the crisis led to a “perfect storm” that made it difficult for many stakeholders, including regulators, to foresee the impending meltdown.
Excessive Mortgage Debt
Poor assessment of ability to repay and inadequate down payments doomed many mortgages. Insufficient consumer protections resulted in many consumers not understanding the risks of the mortgage products offered.
Dominance of Variable Rate and Hybrid Subprime Mortgages
The spread of variable rate and hybrid subprime mortgages in a low-rate environment created excessive risks when interest rates rose.
Overheated Housing Market
Rapidly increasing house prices encouraged speculation, which further drove up prices. The availability of easy credit caused many borrowers to take on levels of debt they could not afford.
Lack of Market Discipline in Mortgage-Backed Securities Market
Growth in the private mortgage-backed securities market was fueled by lax standards in assigning credit ratings, which hid building systemic risk.
Safety and Soundness Problems at Large Banks
Many large banking firms had insufficient levels of high-quality capital, excessive amounts of short-term wholesale funding and too few high-quality liquid assets. These problems were frequently compounded by inadequate internal risk measurement and management systems.
Risky Behavior by Nonregulated Financial Firms
Sometimes referred to as the “shadow banking system,” this collection of financial firms included insurance companies and captive finance companies, among others. These firms engaged in activities that increased risks inherent in the financial system as a whole without any meaningful regulatory oversight.
Lack of Broad Oversight
Finally, while various regulators oversaw parts of the financial system, there was no one regulator responsible for the consolidated supervision of systemically important financial firms. Moreover, no authority was assigned the responsibility of overseeing systemic risk.
