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The Regulatory Responses to the Global Financial Crisis

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The Regulatory Responses to the Global Financial Crisis

Some Uncomfortable Questions

IMF,

15 min read
10 take-aways
Audio & text

What's inside?

Answers to the global financial crisis – and to the question of how to avoid another one – remain elusive.

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Editorial Rating

7

Qualities

  • Comprehensive
  • Eye Opening
  • Background

Recommendation

The economic crisis that rocked the world in 2008 has left many wondering about the global financial system’s stability. Is another major shock to the system lurking around the corner? This paper from Stijn Claessens and Laura Kodres, economists at the International Monetary Fund, provides a wake-up call to those who think that policy makers have even identified – much less addressed – all the problems that led to the most recent financial crisis. While the report is short on specific solutions, and its economic jargon and grammatical issues make for a somewhat sluggish read, the breadth of its examination of critical issues makes it a worthwhile addition to the ever-growing literature on global financial reform. getAbstract recommends this comprehensive analysis to bankers, market participants and policy makers interested in understanding the continuing systemic flaws within global financial markets and the directions society might take to tackle these failings.

Summary

A World in Crisis

For most market participants, the financial crisis of 2008 was sudden and unexpected in light of what appeared to be adequate financial regulation and corporate risk controls within sound, well-run financial markets and institutions. The crisis and its aftermath highlighted both recurring and new faults within the global financial system. Yet many reforms, so far, have fallen short of addressing systemic risks and have failed to provide clear evidence of the costs, benefits and implementation issues these changes will bring.

In 2008, multiple interrelated causes ignited economic woes, which spiraled out of control. Lax lending standards led to a credit boom that permitted excessive leverage, particularly among borrowers who were ill-equipped to pay their debts. A rapid appreciation in asset prices, most notably in housing, led to bubbles that burst when collateral values plummeted. The creation of complex, risky securities – such as collateralized debt obligations based on mortgages and other inflated assets – added to the system’s shakiness.

Amid these myriad systemic flaws, regulators failed to identify and address risks within individual ...

About the Authors

Stijn Claessens and Laura Kodres are economists at the International Monetary Fund, a global organization that provides advice and financing to IMF member states in economic difficulties and works to reduce poverty in developing nations.

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