Too Big to Fail: An Analysis of Systemic Risk in the 2008 Financial Crisis

Research Article
Open access

Too Big to Fail: An Analysis of Systemic Risk in the 2008 Financial Crisis

Songyin Xiao 1*
  • 1 Haide College, Ocean University of China, Qingdao 266100, China    
  • *corresponding author xiaosongyin@stu.ouc.edu.cn
Published on 10 November 2023 | https://doi.org/10.54254/2754-1169/34/20231694
AEMPS Vol.34
ISSN (Print): 2754-1177
ISSN (Online): 2754-1169
ISBN (Print): 978-1-83558-089-9
ISBN (Online): 978-1-83558-090-5

Abstract

The recent bankruptcy of Silicon Valley Bank and the awarding of the Nobel Prize in Economics have both brought attention back to the issue of how to lower systemic risk in the banking industry and stop or lessen the severity of a financial crisis. To study this issue, this paper reviews the 2008 U.S. subprime mortgage crisis, explaining the causes of the crisis and its tremendous adverse effects from the perspectives of, among others, the U.S. monetary policy, the emergence of the Credit Default Swap (CDS) frenzied property market, and the lack of regulation in the financial sector. It also describes the measures taken by the government and banks to resolve the crisis from their perspectives. Further among them, the paper reviews the process of Basel III in strengthening the regulation of large financial institutions, prompting them to improve their capital adequacy ratios and reduce systemic risk. The key role played by systemic risk in preventing the crisis and reducing its impact is emphasized. Thereafter, this paper compares and unfolds the subprime crisis of 2008, the Japanese financial crisis of the 1990s, and the recent Covid-19 crisis to illustrate the responsibility of the banking sector to society. The paper also suggests that banks should increase their capital adequacy ratio, reduce excessive risky investments, reduce systemic risk, ensure their credibility in society, and prevent bankruptcies in today's fluctuating national monetary policies and tense economic situation.

Keywords:

subprime mortgage, systemic risk, capital adequacy ratio

Xiao,S. (2023). Too Big to Fail: An Analysis of Systemic Risk in the 2008 Financial Crisis. Advances in Economics, Management and Political Sciences,34,146-152.
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References

[1]. The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2022. Nobel Prize org. https://www.nobelprize.org/prizes/economic-sciences/2022/prize-announcement/, last accessed 2023/04/05.

[2]. Lin, J., & Treichel, V.: The Unexpected Global Financial Crisis: Researching Its Root Cause. World Bank Policy Research Working Paper (2012).

[3]. Sanders, A. B.: The subprime crisis and its role in the financial crisis. Journal of Housing Economics, 17(4), 254–261 (2008).

[4]. Murphy, A.: An Analysis of the Financial Crisis of 2008: Causes and Solutions. Social Science Research Network (2008).

[5]. Financial crisis of 2007-08: Definition, Causes, Effects, & Facts. Encyclopedia Britannica. https://www.britannica.com/event/financial-crisis-of-2007-2008/Key-events-of-the-crisis, last accessed 2023/03/15.

[6]. Lipscy, P. Y., & Takinami, H.: The Politics of Financial Crisis Response in Japan and the United States. Japanese Journal of Political Science, 14(3), 321–353 (2013).

[7]. Dodd-Frank Act: What It Does, Major Components, Criticisms. Investopedia. https://www.investopedia.com/terms/d/dodd-frank-financial-regulatory-reform-bill.asp, last accessed 2023/03/15.

[8]. Acharya, V. V., & Richardson, M.: Implications of the Dodd-Frank Act. Annual Review of Financial Economics, 4, 1–38 (2012).

[9]. Basel III: What It Is, Capital Requirements, and Implementation. Investopedia. https://www.investopedia.com/terms/b/basell-iii.asp, last accessed 2023/03/15.

[10]. Hartlage, A. W.: The Basel III Liquidity Coverage Ratio and Financial Stability. Michigan Law Review, 111(3), 453–483 (2012).

Cite this article

Xiao,S. (2023). Too Big to Fail: An Analysis of Systemic Risk in the 2008 Financial Crisis. Advances in Economics, Management and Political Sciences,34,146-152.

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About volume

Volume title: Proceedings of the 7th International Conference on Economic Management and Green Development

ISBN：978-1-83558-089-9(Print) / 978-1-83558-090-5(Online)
Editor：Canh Thien Dang
Conference website: https://www.icemgd.org/
Conference date: 6 August 2023
Series: Advances in Economics, Management and Political Sciences
Volume number: Vol.34
ISSN：2754-1169(Print) / 2754-1177(Online)

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References

[1]. The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2022. Nobel Prize org. https://www.nobelprize.org/prizes/economic-sciences/2022/prize-announcement/, last accessed 2023/04/05.

[2]. Lin, J., & Treichel, V.: The Unexpected Global Financial Crisis: Researching Its Root Cause. World Bank Policy Research Working Paper (2012).

[3]. Sanders, A. B.: The subprime crisis and its role in the financial crisis. Journal of Housing Economics, 17(4), 254–261 (2008).

[4]. Murphy, A.: An Analysis of the Financial Crisis of 2008: Causes and Solutions. Social Science Research Network (2008).

[5]. Financial crisis of 2007-08: Definition, Causes, Effects, & Facts. Encyclopedia Britannica. https://www.britannica.com/event/financial-crisis-of-2007-2008/Key-events-of-the-crisis, last accessed 2023/03/15.

[6]. Lipscy, P. Y., & Takinami, H.: The Politics of Financial Crisis Response in Japan and the United States. Japanese Journal of Political Science, 14(3), 321–353 (2013).

[7]. Dodd-Frank Act: What It Does, Major Components, Criticisms. Investopedia. https://www.investopedia.com/terms/d/dodd-frank-financial-regulatory-reform-bill.asp, last accessed 2023/03/15.

[8]. Acharya, V. V., & Richardson, M.: Implications of the Dodd-Frank Act. Annual Review of Financial Economics, 4, 1–38 (2012).

[9]. Basel III: What It Is, Capital Requirements, and Implementation. Investopedia. https://www.investopedia.com/terms/b/basell-iii.asp, last accessed 2023/03/15.

[10]. Hartlage, A. W.: The Basel III Liquidity Coverage Ratio and Financial Stability. Michigan Law Review, 111(3), 453–483 (2012).

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