What is Global Financial Crisis?
Since the 1929 stock market crash, this financial crisis has been the most prominent economic disaster. With the fall of investment bank Lehman Brothers in September 2008, it developed into a global financial crisis that began with a subprime mortgage lending crisis in 2007.
During the global financial crisis in 2007, many banks could not quickly and accurately identify risk concentrations due to an inability to aggregate risk exposures and report bank-wide risks effectively.
The cheap cost of money made it easier for people to borrow and acquire real estate property, fuelling a rapid and unsustainable increase in house prices. Financial innovations (securitisation) meant that mortgages could now be easily originated by lenders, repackaged, and sold to investors seeking higher yields, reducing the credit risk borne by the originators. This led to originating banks becoming less concerned with the credit quality of their borrowers, which then led to more relaxed lending standards.
Why is the global financial crisis significant?
Risk Management is an evolving field, and all the practices get changed with a new event happening. Whatever risk management practices we follow today is mainly because of the financial crisis of 2008-09. The crisis was primarily because of liquidity issues, and right after it, Basel III was issued, which covered all flaws about liquidity risk and introduced several initiatives to be adopted.