The causes of the 2008 financial crisis ，deregulation

  In my last blog post, I mentioned that the deregulation adopted by the U.S. Congress in the late 1990s contributed to the financial crisis. I'm going to focus here on the U.S. market and government.

Sources:CARPE DIEM: Bank Business Loan Charge-Off Rates Returning to 2007 Levels, Bank Failures Lowest Since 2008 (mjperry.blogspot.com)

  According to Barry Eichengreen, the deregulation of financial markets was the root cause of the financial crisis. Excessive deregulation by the securities and exchange commission (SEC) in the United States contributed to the liquidity crisis in global markets in 2008. In 2004, the SEC adopted the Joint Regulated Entity (CSE) program, which allowed many of America's largest investment banks to join the program to evade the SEC's traditional net capital rules and impose greater leverage ratios. But the scheme is a "co-product" of Europe's financial group directive. During the financial crisis, the five major investment banks that joined CSE all went into decline or even filed for bankruptcy. So the banks switched from the SEC to Fed regulation. Prove that the SEC's CSE plan allowed the banks to avoid the oversight they should have been subjected to and suffered big losses.

Sources: What Went Wrong? An Initial Inquiry Into the Causes of the 2008 Financial Crisis

  America's CSE plan is not about deregulation. But a series of actions led to the fact that it was deregulated. Europe's Financial Group Directive aims to strengthen the supervision of financial holding companies. This poses a challenge for the United States, which needs to accept stricter global regulations. That led to the CSE plan, but the SEC compromised financial firms in exchange for looser rules on capital adequacy that subject parent companies to greater oversight. The commission believes it is merely following the "Basel II" standards. Introduced policies in 2004 that allowed investment banks to develop their own personalised credit-risk modelling systems, plus SEC staff members were unable to closely monitor investment banks or require them to take action. These actions tilted US policy towards deregulation, and crises that should have been detected went undetected.

  In my next blog post, I'll look at another cause of the financial crisis - excessive leverage.

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