Page 17 - Risk Management Bulletin February 2024

RMAI BULLETIN FEBRUARY 2024

on the other hand, were frequently high-risk and debt in relation to their assets, making them sen-
poorly underwritten, and many borrowers subse- sitive to market fluctuations.
quently defaulted on their loans.
Lessons Learned:
This resulted in a surge of subprime mortgage defaults Y The significance of competent financial industry
and a severe drop in the value of mortgage-backed regulation and oversight in preventing excessive
securities. As a result, the banking industry had a li- risk-taking and ensuring financial system stability.
quidity crisis, as financial institutions that had substan-
Y The need for greater transparency and under-
tially invested in these securities suffered significant standing of complex financial products and their
losses.
potential influence on the economy as a whole.
Y The risks of excessive leverage, as well as the re-
As the crisis worsened, several banks became highly
leveraged, which means they took on a large amount quirement for financial institutions to have ad-
equate capital buffers to withstand market swings.
of debt in relation to their assets. This exposed them
to market volatility and contributed to a credit crisis Y The significance of international collaboration and
as banks grew hesitant to lend to one another or to coordination in addressing global economic diffi-
other firms and consumers. The issue swiftly expanded culties.
beyond the United States and had far-reaching global
ramifications. Remedies:
Y The Troubled Asset Relief Programme (TARP) was
The crisis had far-reaching and long-lasting implica- a US government programme that supplied fund-
tions, including the loss of millions of jobs, the failure ing to banks and other financial institutions in
of numerous large financial institutions, and a dramatic order to stabilize them.
drop in global economic activity. It also emphasized the
Y The Dodd-Frank Wall Street Reform and Consumer
significance of competent financial industry regulation Protection Act was a comprehensive financial re-
and control, as well as the need for international co- form law that attempted to improve financial in-
operation in responding to global economic difficulties. dustry regulation and oversight.

Y Economic stimulus programmes are intended to
Causes: boost economic growth and reduce unemploy-
Y Easy Credit: Lenders loosened lending require- ment.
ments and made loans to borrowers who were
Y International collaboration - such as the G20 ef-
unable to repay them, resulting in a large spike in
fort, which aims to coordinate responses to glo-
subprime mortgage lending.
bal economic difficulties.
Y Housing Bubble: The housing bubble, which was
supported by low interest rates and easy credit, Case Study 3:
caused house prices to surge, resulting in a dra-
matic decrease in housing values and a wave of The Thalidomide disaster of the 1960s
defaults. The Thalidomide disaster occurred in the 1960s and
was caused by a medicine named thalidomide. Thali-
Y Derivatives: The use of sophisticated financial in-
domide was initially sold in various countries, includ-
struments, such as credit default swaps and col-
ing Germany, the United Kingdom, and Canada, as a
lateralized debt obligations, that were poorly un- sedative and anti-nausea drug. It was hailed as a
derstood and poorly regulated, allowed risks to
miracle treatment with few adverse effects, and it was
spread across the financial system. commonly recommended to pregnant women in the
Y Over-leverage: Financial institutions, such as early stages of their pregnancy to help relieve morn-
banks, investment firms, and insurance compa- ing sickness.
nies, had become highly leveraged, which meant
that they had taken on substantial amounts of However, doctors began to detect a sudden increase

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