Reasons For The Year / 08 Deepened Financial Crisis Of The European Union ( Eu ) And Critically Assess
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Explain the reasons for the 2007/08 deepened financial crisis in the European Union (EU) and critically assess its response to its crisis.
As a whole, the regulation of banking institutions and financial markets are considered as a debatable issue. Banking is considerably the most deeply regulated industry within the financial sector which is also one of the heavily regulated sectors in the economy. Many financial systems are disposed to periods of lack of stability.
However, in the result of the crisis of 2007, in the approaching years the financial regulatory authority has reflected on how to approach the supervision and financial regulation. I am going to discuss the reasons for the deepened financial crisis that occurred…show more content… When financial markets fail to work effectively, it causes contractions in economic activity. (Mishkin et al., 2013). Casu et al. (2006) say that in recent years, many financial crisis around the world have carried about a large number of bank failures which led to agreements for more effective regulation and supervision. Whereas some blame crisis for failure in regulation. Activists of ‘free banking’ argue that the financial sector would work better without regulation, supervision and central banking. (Casu et al., 2006)
Financial crisis usually would occur due to banks creating too much money, too quickly and using it to push up house prices and speculating on financial markets. This is exactly what happened which caused the 2008 crisis as mortgage brokers got bonuses for lending out more money but that encouraged them to make risky loans which hurts profits in the end. This led to moral hazard, when one person takes on more risk because someone else bears the burden of that risk.
Banks and lenders were willing to lend to subprime borrowers, those with poor credit history, because they plan to sell the mortgages to somebody else. Once banks started to notice that subprime loans were defaulting, they started seeing trouble meaning that they had to then worry about housing market prices as it was never an issue before. (DeGrace, 2011) People thought they would pass the risk of the line. Going back to moral hazard, the