Despite the Australian financial system being in a much better position before the GFC, given the magnitude of the shock to the global economy and to confidence more broadly, there was also a large policy response in Australia to ensure that the economy did not suffer a major downturn.
In particular, the Reserve Bank lowered the cash rate significantly, and the Australian Government undertook expansionary fiscal policy and provided guarantees on deposits at and bonds issued by Australian banks. Together, APRA and the financial market and corporate regulator, the Australian Securities and Investments Commission, have also strengthened lending standards to make the financial and private sectors more resilient.
Skip to content JavaScript is currently disabled. In Education. The Global Financial Crisis. Main Causes of the GFC As for all financial crises, a range of factors explain the GFC and its severity, and people are still debating the relative importance of each factor. Some of the key aspects include: 1. Excessive risk-taking in a favourable macroeconomic environment In the years leading up to the GFC, economic conditions in the United States and other countries were favourable.
Banks and other lenders were willing to make increasingly large volumes of risky loans for a range of reasons: Competition increased between individual lenders to extend ever-larger amounts of housing loans that, because of the good economic environment, seemed to be very profitable at the time.
This also reflected the widespread presumption that favourable conditions would continue. Additionally, lenders had little incentive to take care in their lending decisions because they did not expect to bear any losses. Over time, MBS products became increasingly complex and opaque, but continued to be rated by external agencies as if they were very safe. Investors who purchased MBS products mistakenly thought that they were buying a very low risk asset: even if some mortgage loans in the package were not repaid, it was assumed that most loans would continue to be repaid.
These investors included large US banks, as well as foreign banks from Europe and other economies that sought higher returns than could be achieved in their local markets. Increased borrowing by banks and investors In the lead up to the GFC, banks and other investors in the United States and abroad borrowed increasing amounts to expand their lending and purchase MBS products. Regulation and policy errors Regulation of subprime lending and MBS products was too lax.
Stresses in the financial system Stresses in the financial system first emerged clearly around mid Spillovers to other countries As noted above, foreign banks were active participants in the US housing market during the boom, including purchasing MBS with short-term US dollar funding. Failure of financial firms, panic in financial markets Financial stresses peaked following the failure of the US financial firm Lehman Brothers in September Policy Responses Until September , the main policy response to the crisis came from central banks that lowered interest rates to stimulate economic activity, which began to slow in late Increased government spending Governments increased their spending to stimulate demand and support employment throughout the economy; guaranteed deposits and bank bonds to shore up confidence in financial firms; and purchased ownership stakes in some banks and other financial firms to prevent bankruptcies that could have exacerbated the panic in financial markets.
Stronger oversight of financial firms In response to the crisis, regulators strengthened their oversight of banks and other financial institutions.
Australia and the GFC Relatively strong economic performance Australia did not experience a large economic downturn or a financial crisis during the GFC.
The relatively strong performance of the Australian economy and financial system during the GFC, compared with other countries, reflected a range of factors, including: Australian banks had very small exposures to the US housing market and US banks, partly because domestic lending was very profitable.
Subprime and other high-risk loans were only a small share of lending in Australia, partly because of the historical focus on lending standards by the Australian banking regulator the Australian Prudential Regulation Authority APRA.
Australia's economy was buoyed by large resource exports to China, whose economy rebounded quickly after the initial GFC shock mainly due to expansionary fiscal policy. Initially the RBA accepted only the asset backed securities that were eligible for sale in the wholesale markets, however as the crisis worsened the RBA started to accept internal securitisation securities. Internal securitisation is where a licensed bank sells a pool of mortgages to a related special purpose vehicle SPV , and this SPV issues debt securities which are held entirely by the licensed bank which originated the mortgages.
The sole purpose of these asset backed securities is to use as collateral with the RBA in its repurchase agreement program, that is these securities are not available to investors on the wholesale markets. Graph 3 shows the significant growth in total bank and securitisation loan net transactions new loan issuance less repayments in the 10 years before the GFC. This growth was related to financial liberalisation in Australia from the early s, plus lower interest rates and inflation making it cheaper to borrow.
As the GFC hit there were impacts on the 'on market' securitiser loan market Graph 3 , with negative net loan transactions where repayments were larger than new loan issuance from September quarter through to March quarter There were significant net loan repayments in the December quarter and from the June quarter to December The main factor driving negative growth in securitised loan assets was the oversupply of RMBS in the wholesale markets.
With the onset of the GFC, reduced demand from overseas investors resulted in a sell off of the RMBS into the domestic market as overseas investors liquidated their portfolios.
As a result, cost of purchase of these securities was prohibitive to make new issuance of securities economic. Soon after the GFC, the Commonwealth government implemented a policy to support competition in the residential mortgage market by purchasing new RMBS issues within the 'on market' securitisation market.
In the last three years the Commonwealth government has been gradually divesting the RMBS as the 'on market' securitiser market began to recover. Graph 3 shows that overall the banks loan market including the internal securitised market significantly slowed during the GFC.
This reflected difficult credit conditions in the global wholesale markets; cautious behaviour by households; slowed economic activity; and stronger lending standards.
Bank loan market growth picked up in reflecting ongoing strength in deposit funding for lending and less reliance on wholesale funding. It slowed down again in reflecting deleveraging behaviour by households and business, and also business moving more towards wholesale markets for their funding.
Since then there has been an overall slowdown up to September quarter with some volatility. This coincides with tighter lending standards with investor housing slowing in particular in , collateral requirements for higher-density residential projects and other commercial property development, and banks reduced exposures to resource related businesses.
Graph 3 shows the net positive transactions of the internal securitised loans evident during the GFC, as banks obtained funds from the RBA repurchase agreement program. Internal securitisation remained subdued from until the sovereign debt crisis in Europe in , where transactions in internal securitisation can be observed as banks prepared for the deterioration in the credit markets, and planned to have RMBS ready for future transaction in the repurchase lending program with the RBA.
The CLF ensures that participating banks have enough access to liquidity to respond to an acute stress scenario. To meet the regulatory requirements set by authorities, the internal securitisation market of banks increased significantly up until when the CLF was introduced. The national general Commonwealth government contributes to economic growth through spending on final consumption and investment.
Prior to the GFC, this expenditure and investment was mostly funded through substantial gross saving driven by growth in tax receipts.
During this time the national general government was in a net lending position allowing it to invest in the financial markets or pay off liabilities. Since September quarter , the national general government has been in a net borrowing position.
Graph 4 shows the government expenditure to stimulate the Australian economy during the GFC negative gross saving. In the years after the GFC, and up to early , the national general government had been in a net borrowing position, however this borrowing is declining, reflecting improved taxation receipts from corporations due to increased profits related to commodity prices and increased compensation of employees.
Graph 5 shows the national general government total outstanding liabilities. Graph 5 shows that the national general government funded its net borrowing from the onset of the GFC and up to September quarter by issuing substantial amounts of long term bonds. Graph 6 illustrates the ownership of national general government bonds.
Ten years prior to the GFC, institutional investors pension funds, life and general insurers and investment funds were the major investors, however their investment declined and foreign investors took up this declining share as the GFC approached.
Since the GFC, foreign investors have been the major investor in these bonds. Graph 6 shows the increasing investment by banks since the GFC, reflecting tightening of regulative standards with banks required to hold a certain amount of high quality low risk assets. The institutional investors investment increased in line with total national general government issuance, and central bank investment increased from and reflects the use of these bonds in the repurchase agreement program.
Household net worth Graph 7 has grown in the decade prior to the GFC and after the GFC up to September quarter , with favourable borrowing conditions and asset price growth.
The banks had a liquidity crisis on their hands, and giving and obtaining home loans became increasingly difficult as the sub-prime lending bubble burst. This is commonly referred to as the credit crunch of Although the housing collapse in the United States is commonly referred to as the trigger for the global financial crisis, some experts who have examined the events over the past few years, and indeed even politicians in the United States, believed that the financial system needed better regulation to discourage unscrupulous spending.
Major investment bank Legman Brothers, which had sub-prime mortgage-backed securities, filed for bankruptcy on September 15, It was the fourth largest bank in the US at the time of its collapse which sparked a banking crisis in the US, Europe and across parts of Asia.
Governments around the world struggled to rescue giant fiscal institutions as the fallout from the housing and stock market collapse worsened. Many financial institutions continued to face serious liquidity issues. The New Zealand Government announced a number of policy changes, including cuts to personal income taxes, cuts to business taxes and infrastructure spending aimed to jump-start the slowing economy.
The U. Some members of US Congress objected to the use of taxpayer money to bail out wall street investment bankers, who some believed were one of the causes of the global financial crisis.
By September and October of , people began investing heavily in gold, bonds and US dollar or Euro currency, as these were seen as safer alternatives to the ailing housing and stock markets. Sign up for free to receive more news and guides, straight to your inbox.
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