Answer to Question #307104 in Finance for Comfort

Question

Discuss the main causes of the financial crisis of 2008? Identify the main risk that contributed to this crisis

Answer 1

The overextension of credit to unqualified borrowers, the extensive use of shadow banking and shady financial instruments on Wall Street, and the absence of federal control were all major contributors to the 2008 financial crisis. Many banks used deposit insurance to ensure that consumers who placed money with them might get their money back. Many banks were able to stay solvent as a result of this, even if they did not have enough cash on hand to repay deposits to customers. Deposit insurance, on the other hand, may cause banks to behave more recklessly in times of calm financial conditions owing to moral hazard.