econintersect.com
       
  

FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.



posted on 29 May 2017

Why Didn't Bank Regulators Prevent The Financial Crisis?

from the St Louis Fed

-- this post authored by Julie Stackhouse, Executive Vice President

A number of observers have questioned whether bank regulators could have prevented the financial crisis of 2008. While many market participants recognized the exuberance of the housing market, other factors contributing to the crisis led to a “perfect storm" that made it difficult for many stakeholders, including regulators, to foresee the impending meltdown.

Excessive Mortgage Debt

Poor assessment of ability to repay and inadequate down payments doomed many mortgages. Insufficient consumer protections resulted in many consumers not understanding the risks of the mortgage products offered.

Dominance of Variable Rate and Hybrid Subprime Mortgages

The spread of variable rate and hybrid subprime mortgages in a low-rate environment created excessive risks when interest rates rose.

Overheated Housing Market

Rapidly increasing house prices encouraged speculation, which further drove up prices. The availability of easy credit caused many borrowers to take on levels of debt they could not afford.

Lack of Market Discipline in Mortgage-Backed Securities Market

Growth in the private mortgage-backed securities market was fueled by lax standards in assigning credit ratings, which hid building systemic risk.

Safety and Soundness Problems at Large Banks

Many large banking firms had insufficient levels of high-quality capital, excessive amounts of short-term wholesale funding and too few high-quality liquid assets. These problems were frequently compounded by inadequate internal risk measurement and management systems.

Risky Behavior by Nonregulated Financial Firms

Sometimes referred to as the “shadow banking system," this collection of financial firms included insurance companies and captive finance companies, among others. These firms engaged in activities that increased risks inherent in the financial system as a whole without any meaningful regulatory oversight.

Lack of Broad Oversight

Finally, while various regulators oversaw parts of the financial system, there was no one regulator responsible for the consolidated supervision of systemically important financial firms. Moreover, no authority was assigned the responsibility of overseeing systemic risk.

Congress responded to the financial crisis with the passage of the Dodd-Frank Act. Among its many provisions, the Dodd-Frank Act assigned responsibility to the Federal Reserve for the consolidated supervision of bank and nonbank financial holdings companies. It also created the Financial Stability Oversight Council, which is tasked with the responsibility of identifying threats that could destabilize the financial system.

Financial Stability Oversight Council Membership
Chairperson
Secretary of the Treasury
Voting Members
Chairperson of the Commodity Futures Trading Commission
Comptroller of the Currency
Chairperson of the Federal Deposit Insurance Corp.
Director of the Consumer Financial Protection Bureau
Director of the Federal Housing Finance Agency
Chairman of the Board of Governors of the Federal Reserve System
Independent Member with Insurance Expertise
Chairman of the National Credit Union Administration Board
Chairman of the Securities and Exchange Commission
Nonvoting Members
Director of the Federal Insurance Office
Director of the Office of Financial Research
State Banking Supervisor
State Insurance Commissioner
State Securities Commissioner

Is this legislative solution sufficient to prevent another financial crisis? One cannot answer with certainty, given the continuing evolution of the financial system. We can, however, conclude that many of the factors contributing to the financial crisis no longer exist and that our financial system is significantly stronger than prior to the crisis.

Follow the Series

Additional Resources

Note

This post is part of a series titled “Supervising Our Nation’s Financial Institutions." The series, written by Julie Stackhouse, executive vice president and officer-in-charge of supervision at the St. Louis Federal Reserve, is expected to appear at least once each month throughout 2017.

Source

https://www.stlouisfed.org/on-the-economy/2017/may/why-didnt-bank-regulators-prevent-financial-crisis

Disclaimer

Views expressed are not necessarily those of the Federal Reserve Bank of St. Louis or of the Federal Reserve System.

>>>>> Scroll down to view and make comments <<<<<<

Click here for Historical News Post Listing










Make a Comment

Econintersect wants your comments, data and opinion on the articles posted. You can also comment using Facebook directly using he comment block below.




Econintersect Contributors








search_box
Print this page or create a PDF file of this page
Print Friendly and PDF


The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.







Keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government





























 navigate econintersect.com

Blogs

Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day
Weather

Newspapers

Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government
     

RSS Feeds / Social Media

Combined Econintersect Feed
Google+
Facebook
Twitter
Digg

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution

Contact

About

  Top Economics Site

Investing.com Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2017 Econintersect LLC - all rights reserved