Vous êtes sur la page 1sur 27



An assessment of the causes, impacts of the global financial crisis and the intended measures by the Bank of International Settlement






Table of Contents
Title Pages

1.0 Introduction ............................................................................................................................... 3

1.1Backround ...................................................................................................................................... 3 1.2 Terminology used in the paper ................................................................................................... 5 1.3 Research Objectives ................................................................................................................... 7 Research Questions ......................................................................................................................... 7

2.0 Literature Review .................................................................................................................... 8

2.1Theoretical Framework ................................................................................................................... 8 2.2 Empirical literature .................................................................................................................... 9


Methodology ....................................................................................................................... 11

3.1 The-Cause-Effect-Solution Model (CES Model) of the GFC ............................................................ 11 4.0 Interpretation of the CES Model and answering the research questions under discussion. ........ 12 4.1 Causes of the GFC ........................................................................................................................ 12 4.1a The Triggers of the GFC. ......................................................................................................... 12 4.1b Vulnerabilities as causes of the GFC ....................................................................................... 13 4.2 Effects of the GFC and data presentation ..................................................................................... 16 4.3 The BIS intended measures to the GFC. ........................................................................................ 23

5.0 Conclusion and Recommendations. ............................................................................... 25

5.1 Recommendations ....................................................................................................................... 26

6.0 Appendix27 7.0 References ................................................................................................................................ 27

1.0 Introduction
The Global Financial Crisis (GFC) attracted so much attention to the extent that the causes and the impacts of such were either exaggerated or ignored. Even reactions to curb the impacts and even to curtail the crisis were met with mixed opinions and feelings. Consequently, the purpose of this paper is to assess the causes of the global financial crisis while exhuming the impacts to both the developed and the developing countries. The paper will also highlight the actions taken by the Bank of International Settlement through its watchdog-the Basel Committee on Banking Supervision in trying to curb the crisis while also analysing the efficacy and caveats of such intended measures. 1.1Backround The 1929-33 Great Depression was one of the unforgettable crises that awakened governments especially the United States of America when Roosevelt intervened with his contractionary monetary policy after he called for the abolishment of the gold standard in response to the liquidationist theory of increasing money supply. The intervention by the US government was in line with the assertions of Keynes (1936) in his General Theory that the government need to intervene in the economy rather that leaving it exposed to the wiles of the invisible hand. However this was not sustainable after the World War II when it was decided that that the financial system had to be liberalised. Financial liberalisation made the financial system precarious and susceptible to the horrors of the capitalist economies which were later mentioned by Minsk (1986) in his Financial Instability Hypothesis as highly unstable. Since the 1972-73 oil crises, there were many booms and busts that destabilised the world economies but all of them were not given much attention because of the gravity of such crises. The period of Great Moderation which began in the middle 1980s made governments to be more focused in monetary stability while sacrificing financial stability. This was mainly maybe due to the fact that the prior crises were linked to production rather than to the financial system given Schumpeter (1912) views that many business cycles are linked to the disturbances in the production sector. The above assertion by Schumpeter was over exaggerated because all the transactions of the economy end up in the financial system which is too delicate to be ignored. Focusing mainly on the monetary stability created an imbalance because it exposed the financial system to manipulation by the speculative participants who could not behave rationally. Failure to behave rationally by the participants in the financial system culminated into a deadly euphoria that led into the global financial crises in 2007-9 hence Krugman (2009) says what went wrong Minsk was right. This is because the regulators were on holiday leaving the invisible hand to create an equilibrium which was farfetched.

As mentioned by Bernanke in his lecture series in at Washington University in 2010, the period of Great Moderation which began in 1987 and ended in 2006 was similar to the period after the WWI which was duped the the roaring twenties. There was noticeable stability in the economies that the Federal Reserve was mainly focused on monetary Stability at the expense of financial stability. During the great inflation of the 1970s output and inflation were volatile, but following Volkers disinflation from 1980s through to 2007(Chairman Greenspan early time) both output and inflation were less volatile Bernanke said in 2010. This period was called the Great Moderation which was exacerbated by improvement in money supply after 1979.Consequently, this tranquillity diverted attention to monetary policy and monetary stability rather that to financial stability and financial regulation. The prelude to the financial crisis now was marked by a rise in housing prices which began in the 1990s when housing prices grew rapidly by 130%. This caused mortgaged lending standards to deteriorate drastically since there was an overflow of house buyers when house buying became a cant lose investment. Prior to the early 2000s many homebuyers made a significant down payment and documented their finances in detail, but as house prices rose, many lenders began to offer mortgages to less qualified borrowers(non-prime mortgages) that required little or no down payment and little or no documentation. This generated lowest quality credit and increased the number of nonprime loans. Due to continuous increase in demand for houses, the prices also rocketed until they were not affordable and this resembled the peak of the housing bubble. As demand fell, house price also started falling. The falling of the prices resembled the bursting of the housing bubble. This means that the house owners now had borrowed more than the value of their houses hence they defaulted payment of their debt to the banks leading to the beginning of the Global Financial Crises (GFC) in 2007-9. However the GFC attracted debate all over the world that has led the Bank of International Settlement (BIS) to intervene with another tailor made Basel Capital Accord III among other measures inorder to curb the devastating effects of the crisis. The BIS enacts all these policies through its committee known as the Basel Committee on Banking Supervision which is base at the Banking of International Settlement in Basel Switzerland. Consequently, the purpose of this paper is to assess the causes of the Global Financial Crisis (GFC) in 2007-9 while exhuming the impacts to both the developed and the developing countries. The paper will also highlight the actions taken by the Bank of International Settlement (BIS) through its watchdog-the Basel Committee on Banking Supervision in trying to curb the crisis while also analysing the efficacy and caveats of such intended measures.

The paper shall be in Six(6) parts with chapter one being the Introduction, Chapter two -The Literature review, Chapter three -Causes and effects of the GFC, Chapter four- BIS intervention, Chapter five- Effects of the crisis to Zimbabwe and the responds, Chapter sixConclusion and recommendations.

1.2 Terminology used in the paper a. Systemic Risk- In finance, systemic risk is the risk of collapse of an entire financial system or entire market, as opposed to risk associated with any one individual entity, group or component of a system. It can be defined as "financial system instability, potentially catastrophic, caused or exacerbated by idiosyncratic events or conditions in financial intermediaries". It refers to the risks imposed by interlinkages and interdependencies in a system or market, where the failure of a single entity or cluster of entities can cause a cascading failure, which could potentially bankrupt or bring down the entire system or market (www.wikpedia.com accessed 2013). b. Subprime mortgage crises- A situation starting in 2008 affecting the mortgage industry due to borrowers being approved for loans they could not afford. As a result, a significant rise in foreclosures (repossession of the mortgaged property when a loan is not repaid) led to the collapse of many lending institutions and hedge funds. The financial crisis in the mortgage industry also affected the global credit market resulting in higher interest rates and reduced availability of credit. (www.businessdictionary.com). c. Subprime mortgage- A subprime mortgage is granted to borrowers whose credit history is not sufficient to get a conventional mortgage. Often these borrowers have impaired or even no credit history. Subprime mortgages often offer interest-only loans. That's because an interest-only loan is easier to afford. The loan doesn't require that any of the principle be paid for the first several years of the loan. Most borrowers assume they will refinance before the principal needs to be repaid, and the monthly payment increases. If they can't refinance, they often are forced to default because they can't make the higher payment. Subprime mortgages were one of the causes of the 2009 recession (about.com US Economy 2013). d. Colleterised debt obligations (CDO) - CDOs, or Collateralized Debt Obligations, are sophisticated financial tools that banks use to repackage individual loans into a product that can be sold to investors on the secondary market. These packages consist of auto loans, credit card debt, mortgages or corporate debt. They are called collateralized because the promised repayment of the loans is the collateral that gives the CDOs value.







CDOs are a special type of derivative. Like its name implies, derivatives are any kind of financial product that derives its value from another underlying asset. Derivatives, such as put options, call options and futures contracts, have long been used in the stock and commodities markets (ww.investopedia.com). Mortgage backed securities- Mortgage-backed securities (MBS) are investments, somewhat similar to stocks, bonds or mutual funds. Their value is secured, or backed, by the value of an underlying bundle of mortgages. When you buy a MBS, you aren't buying the actual mortgage. Instead, you are buying a promise to be paid the return that the bundle will receive. An MBS is a derivative, because its value is derived from the underlying asset (about.com US Economy 2013). Financial Crisis -An economic recession or depression caused by a lack of necessary liquidity in financial institutions. A financial crisis may be caused by natural disasters, negative economic news, or some other event with a significant financial impact. Financial crises tend to cause decreases in business activities, leading to a selfreinforcing intensification of the crisis (www.investorwords.com). Basel Capital Accord- A set of agreements set by the Basel Committee on Bank Supervision (BCBS), which provides recommendations on banking regulations in regards to capital risk, market risk and operational risk. The purpose of the accords is to ensure that financial institutions have enough capital on account to meet obligations and absorb unexpected losses (www.investopedia.com). Securitisation- Securitization is the process of taking an illiquid asset, or group of assets, and through financial engineering, transforming them into a security. A typical example of securitization is a mortgage-backed security (MBS), which is a type of asset-backed security that is secured by a collection of mortgages (www.investopedia.com) . Financial Instability Hypothesis- Minskys Financial Instability Hypothesis (FIH) is best summarised as the idea that stability is destabilizing. As Laurence Meyer(2002) put it: a period of stability induces behavioural responses that erode margins of safety, reduce liquidity, raise cash flow commitments relative to income and profits, and raise the price of risky relative to safe assets all combining to weaken the ability of the economy to withstand even modest adverse shocks. Meyers interpretation highlights two important aspects of Minskys hypothesis: It is the behavioral responses of economic agents that induce the fragility into the macroeconomic system and after a prolonged period of stability, the economy cannot withstand even modest adverse shocks. Basel Committee on Banking Supervision-The Basel Committee on Banking Supervision provides a forum for regular cooperation on banking supervisory matters. It seeks to promote and strengthen supervisory and risk management

practices globally. The Committee is comprised of central bank and supervisory authority representatives from Argentina, Australia, Belgium, Brazil, Canada, China, France, Germany, Hong Kong SAR, India, Indonesia, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, Russia, Saudi Arabia, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The Committees Secretariat is based at the Bank for International Settlements in Basel, Switzerland. The Basel Committees governing body is the Group of Central Bank Governors and Heads of Supervision, which is comprised of central bank governors and (non-central bank) heads of supervision from member countries. 1.3 Research Objectives The main objectives of this paper are: 1. To assess the causes of the global financial crises 2. To assess the impact of the global financial crises to both developing and developed countries 3. To determine how BIS is intending to deal with the global financial crises Research Questions The main questions that this paper is intending to answer are as follows: 1. What exactly were the causes of the GFC? 2. How did the GFC affected the global economies? 3. What does the Bank of International settlement responding to the crises?

2.0 Literature Review There is a general assumption that United States of America economic failure was the epicentre of the global financial crisis. I s this assertion true? It leaves the author with no option but to consider what other authors said about the causes and effects of the global financial crisis 2.1Theoretical Framework Fed Chairman Ben Bernanke(2010) postulated that the a major cause of the global financial crisis was the period of Great Moderation that left the regulators relaxed This is because inorder to forecast the future of the financial system stability , the regulators were dogged in the prevailing performance in the system Bernankes assertion was supported by Claesberg (2011) who also said the period of great moderation left the financial system with a weak regulatory system which left it to dangers of systemic risk. Claesber(2011) like Bernanke( 2010) defined The Great Moderation as a period from late 1980s to 2006 when there was financial stability that left regulators only concerned with monetary stability rather than the financial stability as well as financial regulation. Bernanke and Claesberg view are well supported by Minsky (1996) in his Financial Instability Hypothesis who said capitalist economies are highly unstable. People in the financial system tend to be carried away to the extent that they will be highly leveraged. Minsky mentioned the issue of business cycle and postulated that business cycle are solely linked to the financial system rather than to production as Schumpeter (1912) asserted .The were three levels in a the business cycle that are followed by a financial system that is the Hedge Finance when borrowers are able to pay back both interest and capital, the Speculative Finance when borrowers cannot pay the principal but are able to pay interest, debts can be rolled over inorder to pay back the principal, the Ponzi Finance who cannot pay back both interest and the principal .The Ponzi finance signify the beginning of the crisis Looking at Minskys assertions, causes of the GFC are easy to deduce hence the GFC was termed The Minskys moment in 2009 by Krugman who says what went wrong, Minsky was right. Another author who supported the idea of business cycle in the capitalist economies was Shiller (2000) in his Irrational Exuberance in which he said people tend to be euphoric such that they fail to notice the impending crisis. Greenspan (1996) once mentioned that The financial system has Irrational Exuberance ,and the statement caused a fall in stock prices since the market thought that there were going to be restrictions imposed. Leaven and Valencia (2012) have also suggested some causes of the GFC apart from those mentioned above as the collapse of the subprime mortgage market in the USA. They also added that derivatives and the collapse of the global trade were the major causes of the GFC.

However, this was also supported by Bernanke who is of the view that the subprime were given a long rope at the expense of the world economy. The BIS (2010), however tend to differ although they are not conflicting on the cause mentioned above but their view is that the crises was a result of the global financial interconnectedness which left the economies vulnerable to systemic risk. This is mainly caused by globalisation and the liberalisation of the financial system. Poor regulatory frameworks and high risk taking through leveraging were major concerns mentioned by BIS (2010) paper. Still on the same point, the BIS view was supported by Mckbbin and Stoekel (2011) who postulated that the credit cycle and the too big to fail institutions contributed significantly, if not wholly to the causes of the GFC. They say that the interblending in the financial system exposed all the banks in the global financial system to contagion risk. However the GFC had so devastating effects to the world economies. Mckbbin and Stoekel (2011) quantified the cost that emanated from the crises and their results shows that trillions of dollars were lost due to the GFC.The cost included lost production, disturbances in the international trade, government bail outs to the financially distressed firms and many other costs. On top of that Bernanke (2010) says the GFC increased financial stress and the fall in the stock markets especially the SP500. He also noted high unemployment, and collapse of home construction as the effects of the GFC. In response to the effects of the crisis and the crisis per se, the BIS under its watchdog the Basel Committee on Banking Supervision and the Financial Stability Board enacted some measure to counter the effects of the global financial crisis. The measure is enshrined in the Basel III (BIS 2009 paper). Basel III is meant to improve the financial system regulation. The author would summarise the above by saying, theoretically, the crisis was a result of financial liberalisation and poor regulation whose effects affected the world GDP of which the BIS has responded inorder to curb the effects of the crisis. 2.2 Empirical literature The GFC affected all the countries in the world and there is sufficient evidence that Zimbabwe was no spared. Empirical literature can evidence that despite the fact that during the period when the GFC took place Zimbabwe was I the doldrums of the hyperinflation, it was not spared by the GFC as it is not detached from the world trade Reduction in production from most sectors of the economy in 2009 were clear evidence of the debilitating effects of the GFC.The effects of the global financial crisis have been far-reaching,

affecting both the financial and the real sectors of the economy. The most evident impact of the crisis is declining demand for local and regional exports, depressed global commodities prices, job losses and currency dislocations Gono expressed this sentiment when he was presenting the 2009 Monetary Policy Statement. Although this was subject to criticism by some who attributed the problem in the economy the to Gonos money printing mania, there were significant evidence that GFC negatively affected the economy. Moreover Zengeni 2011 supported Gonos statement as he expressed that declining trend of the major indices on the Zimbabwe Stock Exchange has largely followed the effects of the global economic crisis. This is because the Zimbabwe Stock Exchange as the countrys single capital market is a benchmark to the world economic variable measurement. Volatility in stock prices caused by instability in the global economies can be reflected at the stock exchange; hence a fall of stock prices during this time was a sign of the implications imposed by a flop in the world economy In 2009 Vice President Mujuru once mentioned that the country was not spared by the GFC. The impact of the world financial and economic crisis will be more devastating in developing countries, particularly those on the African continent. At lower levels of development, we are more vulnerable to fluctuations in world markets. Coming on the heels of the food and energy crises, the global financial crisis seriously threatens sustained economic growth and sustainable development on the continent and could reverse progress so far attained towards the achievement of the Internationally Agreed Development Goals, including the Millennium Development Goals (MDGs) (V.P Mujuru 2009). The above information and empirical views shows that Zimbabwe was not safe during the financial crisis that rocked d the whole world in 2007-9. The author would surely agree with the theorist that the GFC affected all the nations as long as they were involved in the international trade. This was mainly due to contagion effect or systemic risk. The paper therefore will also answer questions pertaining to the actual causes of the crisis, questions about the effects of the crisis and questions about the reactions of the BIS.


3.0 Methodology This paper is mainly based on the model of the GFC that the researcher has come up with. The model is called The Cause-Effect-Solution Model of the GFC. The model is a summary of the GFC and it constitutes some expiation about the major causes of the GFC. 3.1 The-Cause-Effect-Solution Model (CES Model) of the GFC



VULNERABILTIES Economic Effects Output loss globally High unemployment BASEL III FINANCIAL STABILITY BOARD



Fall in international trade High government spending Financial Effects Financial stress Stock markets plunge Debt payment default and foreclosures Liquidity crisis and risk

Higher capital quality

Internationally harmonised leveraged ratio Global minimum liquidity ratios Enhancing risk coverage Setting up of capital buffers e.g. counter cyclical buffers

Too much debt Great Moderation complacency Poor credit rating

Gaps in the regulatory structure Little or no provision for financial systems stability Monetary policy role failure Regulatory arbitrage

TOO Exotic
financial instruments, e.g. CDOs




The CES Model of the Global Financial Crisis above is a summary of what happened in 20072009. It also shows how the Bank of International Settlement (BIS) is intending to solve the financial crisis effects. According to the model above the crisis were caused by triggers and vulnerabilities in the global financial system. The effects of the GFC were both economic and financial in nature and they affected world economies. The Bank of international Settlement came up with Basel III as a direct response measure to the GFC; hence it sis intending to solve the GFC effects through this Basel III vehicle. 4.0 Interpretation of the CES Model and answering the research questions under discussion. 4.1 Causes of the GFC The cause of the GFC are categorised into the triggers and the vulnerabilities. 4.1a The Triggers of the GFC. Bernanke (2010) descries triggers of the GFC as the forces that exacerbated the GFC. They include the decline in the house prices and associated mortgage losses which resulted into foreclosure and default risk. BIS (2009) also mentioned global financial interconnectedness as a major trigger of the as it cause systemic risk. The BIS is of the view that in 2006 global financial interconnectedness was more sophisticated compared to 1996. The two diagrams below show how global interconnectedness of the financial system triggered the GFC:
1996 UK JAP UK 2006 JAP



Comparing the nature of interconnected ness in the diagram above clearly show that systemic risk is high in 2006 compared to 1996. This is because any financial distress in one country can

easily be contagiously transferred to another country. This is what exactly happened in 2007 when the house bubble busted in USA, causing global shocks and liquidity problems, hence interconnectedness of the global financial system was a major trigger to the GFC. 4.1b Vulnerabilities as causes of the GFC Vulnerabilities were described by Bernanke (2010) as the weaknesses in the financial system that can transform somewhat a modest recession into a severe recession. The financial systems vulnerabilities are split into the private sector vulnerabilities and the public sector vulnerabilities. These are clear described below: a. Private Sector Vulnerabilities The private sector was lulled into complacency during the Great Moderation when borrowers and lenders took on too much debt (leverage). Minsky (1996) postulate that a period of financial stability will eventually leave people in a crisis because of the euphoria amassed during the good times hence stability creates instability. Consequently, the period of Great Moderation encouraged relation on the part of the lenders and borrower who ended up lending to lemons (Arkerlof 1973), hence the lemon problem of adverse selection since there was not enough information about the counterparties. This aggravated the crisis several loans were given to lemons and uncredityworthy customers. Failure to pay by the borrowers and house buyers sparked the crisis and due to the interconnectedness of the financial system, a global financial crisis precipitated in 2007. Banks and other financial institutions failed to adequately monitor and manage the risks they were taking (for example exposures to subprime mortgages). Bernanke (2010) highlights that there was poor credit rating by banks. Loans given to the customer were of poor quality and were not being managed well due to too much euphoria in the financial system. The exposed banks to credit risk since most of their customers were non primes and there were no proper documentation considered when the loan was being issued. Consequently when the housing bubble burst, the financial firms were the first to be hit and due to the globalisation of the financial system, the whole global financial system was thrown into mayhem, and crisis. Moreover, the increased use of exotic financial instruments concentrated risk, especially the credit default swaps used by AIG. The use of the credit default swaps and the collaterised debt obligations also rendered the financial system susceptible to more risk. This sis because failure of any one party into the transaction would expose other preceding parties , for example when banks sold their securities to investors in tranches, they expected to repay the investor if their borrowers(bank customers) pay them(banks) ,but when borrowers defaulted both the banks and the investor lost out and the crisis was ignited. It became the global financial crisis due to the interconnectedness of the financial system.


b. Public Sector Vulnerabilities The public sector vulnerabilities are into two: 1) Gaps in the regulator structure Minsky (1996), attributed the cause of the financial crisis to regulatory failure. The author came up with three types of flaws in the financial systems regulation that can cause financial crisis and these includes: regulatory relaxation, regulatory arbitrage and regulatory capture. Regulatory relaxation can be describe in terms of the Great Moderation when regulators relaxed and lost focus on regulating the financial system to ensure financial stability while regulatory arbitrage is when the financial system circumvent the regulations put in place while taking in high risk assets. Regulatory arbitrage caused firms to circumvent the rule of both Basel I and Basel II, when banks relied much on high risk capital in debts that in equity, as well as in off-balance sheet transactions like securitisation of assets and the use of credit derivatives like credit default swaps. Regulatory capture is a situation when other financial banks are too big to the regulators hence they should not be tampered with and these are called too big to fail banks or systemically important banks. Regulators were lenient on these institutions like the Lehman Brothers, AIG and Northern Rock Merchant Bank. These gaps in the financial system contributed seriously to the start of the GFC. Regulators especially the Fed gave less attention to financial stability compared to the attention that was being given to the monetary stability. This means that there was less financial regulation mainly due to the complacency created by the period of Great Moderation. As a result when the crisis came, the regulators were found unprepared for the crisis hence a mild crisis was transformed into a severe crisis Bernanke (2010) 2) The role of Monetary Policy Some have argued that the Feds low interest rates monetary policy in the early 2000 contributed to the housing bubble which in turn was a trigger to the crisis (Bernanke 2010). This view is based on the theory that low interest rate pushed up investment and high credit creation which generated in to fatal investment euphoria. The euphoria under discussion is said to have contributed to the housing bubble which busted into a global financial crisis in 2007. However, there are arguments against the attribution of monetary policy role as a cause of the GFC that include: If compared international UK had a house bubble during the 2000s despite tighter monetary policy that US Size of the bubble shows that the changes in the mortgage rates during the boom years seemed far too small to account for the magnitude of house price increase

The timing of the bubble show that house prices began to pick up late 1990s before monetary policy began easing and rose sharply after monetary policy tightening in 2004 (for example in the Asian crisis) Consequently despite all the cause given above, economists are still debating about what could be the major cause of the GFC, especially when it comes to the issue of monetary policy as a cause.


4.2 Effects of the GFC and data presentation The effects of the GFC are divided into two as shown on the CES Model above and these include the economic effects and the financial effects a) Economic Effects GFC inflicted severe Output loss globally, high unemployment, fall in international trade and high government spending 1) Global output loss

Key World map1 showing real GDP growth rates for 2009. (Countries in brown were in recession.) Map 1 above shows that the fall in growth rate was mainly associated with the developed countries notably USA, Europe and some parts of Asia and South America. Africa was not severely affected as show by a dominating green colouration.


The bursting of the U.S. housing bubble, which peaked in 2006, caused the values of securities tied to U.S. real estate pricing to plummet, damaging financial institutions globally. The global recession affected the entire world economy, with higher detriment in some countries than others. It is a major global recession characterized by various systemic imbalances and was sparked by the outbreak of the financial crisis of 20072008. The fallout from the recent crisis on the real sector was large. The median output losses for the recent crises are 25 percent of GDP, which is almost 5 percentage points higher than its historical median of 20 percent. Output losses differ depending on the size of the initial shock, differences across countries in how the shock was propagated through the financial system, and the intensity of policy interventions. The output losses for Ireland and Latvia stand out at over 100 percent of potential GDP. Losses among borderline cases are also significant, in particular for Hungary, Portugal, and Spain. On average, countries with larger financial systems, and especially those that experienced rapid expansion prior to the crisis (such as Iceland, Ireland, and Latvia), were hit hardest (Laeven and Valencia (2008)). The graph below shows a significant drop in the global out due to the GFC in 2008. Figure 3: Global output 2004-2010

SOURCE : WORLD BANK 2010 PAPER Figure 3 show the extent to which output has fallen from 2007-2009. Advanced economies are the worst to be hit be the crisis compared to the emerging and the developing economies.


Mickibbin and stoeckel (2010) came up with monetary figures for global output loss and these are shown on the table below: Table 1: showing Mickibbin and stoeckel global output losses valuation Component of the GDP Amount lost US$ trillions Loss to world output $4 trillion Loss of bank market value $5 trillion Government support $15 trillion Mark market asset loss(loss) $24 trillion NPV loss of world output $60-200 trillion The table above show how devastating the GFC was interms of monetary loss interms of GDP loss. The net present loss value of the world out is $60 to $200 trillion which is an alarming figure to talk about. This is merely 5% decrease in the world output within the 2 years of crisis. 2) High Government Spending Graphic showing (figure 4 below) 2008 October bank bailouts by United Kingdom and United States in billions of dollar equivalents. United Kingdom graphics are at top, United States below. Green indicates the annual Gross Domestic Product in 2008, pink indicates the total government spending in 2008, and grey indicates the various bank rescue payments up to 2008 October 13. The 700 billion dollar US bank rescue of the Emergency Economic Stabilization Act of 2008 does not include the additional 150 billion dollar additional provisions. Figure 4 showing USA and UK Government Spending in 2008


3) Fall in employment world wide Figure 5 showing a fall in employment in USA from 2007-2009

GFC resulted in a drastic fall in employment globally. The graph above shows a sharp decrease in the employment as shown by the EMRATIO. The EMRATIO is computed as the "Civilian employment" divided by "Civilian non-institutional population." In September 2012, these were (in thousands) 142,974 and 243,772 respectively, resulting in a ratio of 58.7%. Civilian employment (FRED Data series CE 160V): Includes those employed 16+ years of age but excludes those unemployed or outside the workforce. Civilian non-institutional population (FRED Data series CNP 160V): Civilian no institutional population is defined as persons 16 years of age and older residing in the 50 states and the District of Columbia, who are not inmates of institutions (For example, penal and mental facilities, homes for the aged), and who are not on active duty in the Armed Forces. The total U.S. population was approximately 315 million during 2012.


b) Financial Effects of the GFC. 1. Fall in the subprime lending GFC resulted in the fall in the subprime lending in 2006. The housing bubble bursted in 2006 leaving banks with no choice than to stop lending due to the liquidity crunch. The subprime lending that had increased to over 20% in 2006 dropped sharply as shown in the graph in figure 6 below Figure 6 showing a drop in the subprime lending in 2006.


2. Securitisation collapsed Figure 7 showing the collapse of the securitisation by the financial institution during the GFC.

From Economist Zandi (2010) testimony to the Financial Crisis Inquiry Commission: "The securitization markets also remain impaired, as investors anticipate more loan losses. Investors are also uncertain about coming legal and accounting rule changes and regulatory reforms. Private bond issuance of residential and commercial mortgage-backed securities, asset-backed securities, and CDOs peaked in 2006 at close to $2 trillion...In 2009, private issuance was less than $150 billion, and almost all of it was asset-backed issuance supported by the Federal Reserve's TALF program to aid credit card, auto and smallbusiness lenders. Issuance of residential and commercial mortgage-backed securities and CDOs remains dormant." Banks and other financial institutions packaged various types of loans (including mortgages) into securities and sold them to global investors. This is called securitization. In exchange for purchasing the investment, the investor receives a right to the cash flows from the underlying loans specified for the security. The chart above (figure 7) shows how this financing source dried-up, meaning that non-prime mortgages and other types of loans could not be originated and sold to investor 3. Stock Market Plunge The GFC caused a severe plunge in the stock market leading to a bearish behaviour. Figure 8 below clearly shows a fall in the DJI in 2008 due to the effects of the GFC. This because of the loss of confidence in the market by the investors who wanted to safeguards their investments. Figure 8 showing a plunge in the DJI in 2008


c) Effects of GFC to Africa (Zimbabwe) financial system. Africas low level of financial integration meant that African economies were relatively isolated from the direct impact of the financial crisis. Thus, Africa found itself shielded from the impact of the 2007 subprime and the summer 2008 banking crises, thereby avoiding the effects of a financial crisis that affected the very foundations of international financial markets. Compared to emerging countries, Africas external fi nancing (bond issue, stocks and private borrowing) is low, representing only 4% in 2007 of overall issue for emerging economies. In 2007, bond issues stood at only USD 6 billion, compared to USD 33 billion for Asia and USD 19 billion for Latin America. Furthermore, in terms of access to private resources, Africa received only USD 3 billion in 2007, compared to USD 42 billion in developed countries. Although African banking systems were not directly exposed to the sub-prime crisis, there were strong indications of increased asset price and risk premium volatility on African financial markets as early as the summer of 2008. The contagion and interdependence significantly affected the regions financial markets. For some African markets (e.g. Egypt and Nigeria) , the impact was much higher than for markets in developed countries. Africas relatively liquid financial markets not only suffered from the contagious effect but also faced amplification thereof, possibly attributable to the over-valuation of stocks and the outflow of portfolio investments. African investors, in general, and Egyptian and Nigerian investors in particular, recorded within six months an average loss of more than half the wealth invested at the end of July 2008. This is higher than the losses recorded on American, French and Japanese markets In Zimbabwe the financial system was mire by the banking crisis that have emanated from the hyperinflation hence the effects of the global financial crisis were adding an insult to an injury. Zimbabwes commodities were seriously hit in the international markets forcing mining giants like Bindura Nickel Mine, Shabanie Mashaba Mine, and many others to shut down. This is because the commodity prices had fallen to their historic low levels.


4.3 The BIS intended measures to the GFC. The Basel Committee on Banking Supervision and its oversight body, the Group of Governors and Heads of Supervision, have developed a reform programme to address the lessons of the crisis, which delivers on the mandates for banking sector reforms established by the G20 at their 2009 Pittsburgh summit. This report, which the Committee is submitting to the G20, details the key elements of the reform programme and future work to strengthen the resilience of banks and the global banking system. In response, the Committees reforms seek to improve the banking sectors ability to absorb shocks arising from financial and economic stress, whatever the source, thus reducing the risk of spill over from the financial sector to the real economy. The reforms strengthen bank-level, or micro prudential, regulation, which will help raise the resilience of individual banking institutions in periods of stress. The reforms also have a macro prudential focus, addressing system wide risks, which can build up across the banking sector, as well as the procyclical amplification of these risks over time. Clearly, these micro and macro prudential approaches to supervision are interrelated, as greater resilience at the individual bank level reduces the risk of system wide shocks. 4.3a Basel Capital Accord III Collectively, the new global standards to address both firm-specific and broader, systemic risks have been referred to as Basel III. Basel III is comprised of the following building blocks, which have been agreed and issued by the Committee and the Governors and Heads of Supervision between July 2009 and September 2010: Raising the quality of capital to ensure banks are better able to absorb losses on both a going concern and a gone concern basis; Increasing the risk coverage of the capital framework, in particular for trading activities, securitisations, exposures to off-balance sheet vehicles and counterparty credit exposures arising from derivatives; Raising the level of the minimum capital requirements, including an increase in the minimum common equity requirement from 2% to 4.5% and a capital conservation buffer of 2.5%, bringing the total common equity requirement to 7%; Introducing an internationally harmonised leverage ratio to serve as a backstop to the risk-based capital measure and to contain the build-up of excessive leverage in the system; Raising standards for the supervisory review process (Pillar 2) and public disclosures (Pillar 3), together with additional guidance in the areas of sound valuation practices, stress testing, liquidity risk management, corporate governance and compensation ;

Introducing minimum global liquidity standards consisting of both a short term liquidity coverage ratio and a longer term, structural net stable funding ratio; and Promoting the build-up of capital buffers in good times that can be drawn down in periods of stress, including both a capital conservation buffer and a countercyclical buffer to protect the banking sector from periods of excess credit growth Appendix 1 shows the actual dates set by the Basel Committee so that these intended measures can be affected. The implementation period is given up to 2019 and Basel III is expected to be a pillar in which the financial system is going to lean on. 4.3b The Financial Stability Board. The Committee is also working with the Financial Stability Board to address the risks of systemic banks. On 12 September 2010, the Governors and Heads of Supervision agreed that systemically important banks should have loss absorbing capacity beyond the minimum standards of the Basel III framework. The Committees reforms will transform the global regulatory framework and promote a more resilient banking sector. Accordingly, the Committee has undertaken a comprehensive assessment of Basel IIIs potential effects, both on the banking sector and on the broader economy. This work concludes that the transition to stronger capital and liquidity standards is expected to have a modest impact on economic growth. Moreover, the long-run economic benefits substantially outweigh the costs associated with the higher standards. III framework and related supervisory sound practice standards. It is also conducting work in the following areas: A fundamental review of the trading book The use and impact of external ratings in the securitisation capital framework Policy response to systemically important banks, The treatment of large exposures; Enhanced cross-border bank resolution; A review of the Core Principles for Effective Banking Supervision to reflect the lessons of the crisis; and Standards implementation and stronger collaboration among bank supervisors through supervisory colleges.


5.0 Conclusion and Recommendations. The Global Financial Crisis (GFC) attracted so much attention to the extent that the causes and the impacts of such were either exaggerated or ignored. Even reactions to curb the impacts and even to curtail the crisis were met with mixed opinions and feelings. Consequently, the purpose of this paper is to assess the causes of the global financial crisis while exhuming the impacts to both the developed and the developing countries Given the CES Model used in the text by the author, the major causes of the are the complacency created by the Great Moderation period that left bank taking more risks without proper credit rating. The GFC was termed the subprime mortgage crisis because it was triggered by the housing bubble that bursted in the US. Regulatory relaxation and the gaps in the regulatory structure were also among the major causes of the GFC, because regulators especially the Fed was mainly concerned about the monetary stability at the expense of financial stability. When the crisis started the regulators was not even ready hence according to Bernanke a mild crisis was made a severe crisis. The GFC had severe effects to the global economies. Map 1 in the text shows clearly shows that developed countries were the main affected economies. This is because these economies have greater interconnected financial systems unlike African financial system which is somewhat dislocated from the global financial system (ADB paper2010). The loss to the economies was in form of GDP losses and Table 1 shows that $US60 -200 trillion was lost during the GFC. This is because international trade was disturbed and liquidity crunch started to creep in reducing investment and output growth. Unemployment was one of the severest effects of the GFC; this is because most firms especially banks scaled down inorder to contain the cost associated with the crisis. However the Bank of International Settlement through its watchdog the Basel Committee on Banking Supervision came up with Basel III as a countermeasure to the GFC. The capital accord help to strengthen the financial system at a global level by enhancing the quality of capital, encouraging the use of global harmonised leverage ratio, setting aside of capital buffer , the use of statutory liquidity ratios and to encourage appropriate risk management. The Committee is also working with the Financial Stability Board to ensure the enforcement of the Basel II. The supervision is aimed at reducing the caveats associated with regulatory relaxation that causes the GFC.


5.1 Recommendations The author would want to recommend the following to the regulators be it for developing countries or the developed ones: There is need for flexibility in the financial system so that when a crisis comes the system can quickly be manoeuvred so as to reduce the impact of the crisis. The 20072009 GFC was intensified and prolonged to 3 years because the system was not flexible enough to manoeuvre and adopt new systems. The use of countercyclical capital buffers is one of the best resolutions that the BIS has put in place. This has to be enforced so as to ensure that financial institution will not be found wanting when a crisis comes. This is because capital can be accumulated I good times and used in times of crisis. Above all, financial stability should be given precedence. This sis because monetary stability is a product of financial stability. The fact that regulators concentrated much on monetary stability proved to be dangerous and contributed the GFC hence regulators should ensure financial stability. Regulation of financial system is key to its stability hence government involvement in the financial system is indispensable for economic growth and financial growth as was postulated by Keynes (1936) However, the purpose of this paper was to assess the causes of the global financial crisis while exhuming the impacts to both the developed and the developing countries. The paper also highlighted the actions taken by the Bank of International Settlement through its watchdog-the Basel Committee on Banking Supervision in trying to curb the crisis while also analysing the efficacy and caveats of such intended measures.


7.0 References 1.) Bank for International Settlements 2010 The Basel Committees response to the financial crisis: Report to the G20. 2.) Bernanke (2010), Lecture Series, Th cause and Effects of the Global Financial Crisis. 3.) BIS (2009), Annual Report, 29 June. 4.) BIS (2010), An assessment of the long-term economic impact of stronger capital and liquidity requirements, Basel Committee on Banking Supervision, BIS. 5.) IMF (2009), World Economic Outlook, October, http://www.imf.org/external/pubs/ft/weo/2009/02/index.htm. 6.) Minsky, Hyman P.( 1986), Stabilizing An Unstable Economy. Yale University Press. 7.) Schumpeter, Joseph A. (1934), Theory of Economic Development. Cambridge, Mass. Harvard University Press 8.) Keynes, John Maynard,( 1936), The General Theory of Employment, Interest, and Money. New York: Harcourt Brace. 9.) Akerlof, G.A., and R.J. Shiller, (2009), Animal Spirits How human psychology drives the economy, and why it matters for global capitalism. Princeton and Oxford: Princeton University Press 10.) Shiller, R.J., (2000), Irrational Exuberance. Princeton: Princeton University Press 11) African Development Bank (2009) Financial Crisis Monitoring Group Weekly Report January 2009 12.) African Economic Outlook 2008/09, Preliminary results