Critically Explain The Reasons For The 2007/08 Deepened Financial Crisis In The European Crisis Case Study

Better Essays
Explain the reasons for the 2007/08 deepened financial crisis in the European Union (EU) and critically assess its response to this crisis.

Lehman Brothers was a big global financial services firm. In September 2008 the firm almost brought down the world’s financial system as it collapsed and filed for bankruptcy. This was because they faced liquidity problems because they didn’t have enough capital in reserve.
A financial crisis can be known as a commotion in the financial market. This is associated typically with falling asset prices and insolvency among debtors and intermediaries, which spreads through the financial system, disrupting the market’s capacity to allocate capital. The most common financial crisis occurs when certain
…show more content…
AAA meaning most likely that debt obligations will be honoured and D meaning defaulting on debt obligations. The CRA use this to evaluate potential investors regarding the safety of bonds and derivatives such as collateralised debt obligation.
Credit rating agencies gave high ratings to complex structured subprime debt based on limited historical data. They also failed to adequately disclose assumptions, criteria, and methodologies; clarify the meaning and risk characteristics of structured finance ratings; and address conflicts of interest (FSF, 2008).
During the crisis one of the reasons why it occurred was because loans were given out without proper ratings. This meant there was uncertainty of debt repayment, however the CRA gave AAA ratings to investors instead of CCC. If the CRA’s ratings were used it could’ve been less risky.
Credit rating agencies have put in place a rating procedure for structured products and are taking steps to separate rating activities from other business activities; delink rating managers’ compensation from the financial performance of their business unit; enhance the surveillance of the rating process; and strengthen internal oversight of rating