Causes of Global Financial Crisis + [Article] Look at where debt has gone: MAS chief warns of 3 shifts in global financial risks

3rd December 2018 –

SOURCE: https://www.channelnewsasia.com/news/business/look-at-where-debt-has-gone-mas-chief-warns-of-3-shifts-in-10904600

SINGAPORE: While the fault lines of the last global financial crisis have been mostly addressed, risks remain and have shifted in three ways over the past 10 years, said the Monetary Authority of Singapore’s (MAS) managing director Ravi Menon on Wednesday (Nov 7).

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Last global financial Crisis – period of extreme stress in global financial markets and banking systems between mid 2007 and early 2009. During the GFC, a downturn in the US housing market was a catalyst for a financial crisis that spread from the United States to the rest of the world through linkages in the global financial system.

Many banks around the world incurred large losses and relied on government support to avoid bankruptcy.

Main Causes

1. Excessive risk-taking in a favourable macroeconomic environment

2. Increased borrowing by banks and investors

3. Regulation and policy errors

How the GFC Unfolded – in the following source:

https://www.rba.gov.au/education/resources/explainers/the-global-financial-crisis.html

Interesting read

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These can be seen in the build-up of leverage in emerging market economies, the shift of leverage from banks to non-banks and an increase in corporate bond issuances globally, said Mr Menon as he warned of the possibility of another global financial meltdown.

Mr Menon said: “Energy is never destroyed, it just gets translated into other forms. One can almost say that for risks in financial markets – it just goes to different places.”
“Follow the leverage. Look at where debt has gone.”
The MAS chief pointed out that while advanced economies have weaned off high levels of debt, the opposite has occurred in emerging markets amid loose financial market liquidity conditions.

“Because of tighter regulations, lending by banks has been more responsible although there are still gaps in underwriting standards in some parts of the world. But by and large, a good part of lending has shifted to non-banks, subject to various degrees of regulation, and this is something we need to watch very closely.”

Underwriting services are provided by some large specialist financial institutions, such as banks, insurance or investment houses, whereby they guarantee payment in case of damage or financial loss and accept the financial risk for liability arising from such guarantee.

Note: one of the causes of global financial crisis, as mentioned above, is caused by lax regulations.

The third shift comes in the form of rising corporate bond issuances across both advanced and emerging market economies, with an added dimension of risk for the latter given that “a good part” of these borrowings are US dollar-denominated.

Agreeing, Dr Yellen said while she has a “glass half full” mentality when it comes to financial stability, she is worried about the migration of risks to other areas within the system.

Pointing to the emergence of new risks, such as the build-up of non-financial corporate debt, she added that regulators still lack sufficient tools. Even in the case of the US, it remains unclear whether appropriate tools are in place.
*Almost copied the full article as the whole article has many snippets of useful information*

All credits goes to Tang See Kit of CNN

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