The global financial crisis

Why did the global financial crisis of 2007-09 happen?

Before the crisis, banks were issuing mortgages to subprime borrowers. As fears of these risky loans spread, credit markets froze and several banks failed, requiring government bailouts. Ensuring regulators have sufficient protection from political pressure would help to avoid such crises in future.

Adam Applegarth, the chief executive of UK bank Northern Rock from 2001 to 2007, described 9 August 2007 as a moment in which ‘the world changed’. This day set off a chain of events that would lead to the global financial crisis and the sovereign debt crisis in the eurozone (see Table 1).

Table 1- A timeline of key events in the global financial crisis

9 August 2007	Credit markets freeze when BNP Paribas halts activity in three of their funds due to illiquidity of the subprime mortgages that they are holding.
14 September 2007	The run on Northern Rock begins, the first on a British bank for 150 years.
17 February 2008	Northern Rock is nationalised by the Chancellor of the Exchequer Alistair Darling.
16 March 2008	JP Morgan Chase agrees to rescue the investment bank Bear Stearns, with the US government providing a $30 billion guarantee against its losses.
7 September 2008	The US government takes Fannie Mae and Freddie Mac – two entities that guaranteed mortgages – into temporary public ownership.
15 September 2008	US bank Lehman Brothers files for bankruptcy.
16 September 2008	AIG, a major US insurance company, receives a $85 billion bailout loan from the US Federal Reserve (‘the Fed’).
17 September 2008	Lloyds-TSB agrees, with UK government encouragement, to rescue HBOS.
27 September 2008	The UK government nationalises Bradford and Bingley Bank.
30 September 2008	Ireland’s government promises to underwrite the country’s entire banking system.
3 October 2008	The US Congress approves a $700 billion bailout package for US banks – the Troubled Asset Relief Program (TARP).
13 October 2008	The UK government bails out the Royal Bank of Scotland, Lloyds-TSB and HBOS by taking large ownership stakes in them and guaranteeing their assets.
16 December 2008	The Fed cuts its key interest rate to near zero, the lowest ever in its 95-year history.
22 April 2009	The Chancellor of the Exchequer reveals that bailing out the banking system will result in the largest budget deficit in UK history.
2 May 2010	Greece is bailed out for the first time.
28 November 2010	The European Union (EU) and the International Monetary Fund (IMF) agree a bailout package for Ireland.
5 May 2011	Portugal is bailed out by the EU and the IMF.
21 July 2011	Greece is bailed out for a second time.
8 June 2012	Spain accepts a bailout package from the EU.
26 July 2012	Mario Draghi, the president of the European Central Bank (ECB), states that it will do ‘whatever it takes’ to save the euro.
16 May 2017	The UK government sells its remaining shares in Lloyds Banking Group.
28 March 2022	Government ownership of the NatWest Group (formerly the Royal Bank of Scotland) falls below 50% for the first time since its rescue.

Available at: https://www.economicsobservatory.com/why-did-the-global-financial-crisis-of-2007-09-happen (Acceso el 18-3-2024)