English and Welsh Law Contribute to the Global Banking Crisis

English and Welsh Law Contribute to the Global Banking Crisis



English and Welsh Law Contribute to the Global Banking Crisis

Introduction

Financial crisis of 2007-2009 has been called most serious financial crisis since Great Depression of leading economists, with its global effects characterized by failure of key enterprises, decline in consumer wealth estimated in billion U.S. dollars, major financial commitments made by governments, and the significant decrease in economic activity. (Hill. 2008, pp.15-19) Many causes have been proposed, with varying weight assigned by experts. Both market based and regulatory solutions have been implemented or are under consideration, while still significant risks to global economy.

Section I

A. Recent developments in market for mortgage-backed securities industry have placed U.S. subprime mortgage in centre of attention. In last decade, this market has expanded dramatically, from the small niche segment in the substantial part of U.S. mortgage market in general. Can recent market turmoil - triggered by sharp increase in delinquency rates - be related to rapid expansion? In other words, is recent experience, in part, result of the credit boom gone badly? Although many would say yes to these questions, rigorous empirical evidence on matter has been inadequate.

B.There seems to be widespread agreement that periods of rapid credit growth tend to be accompanied by loosening of lending standards. For example, in the speech before Independent Community Bankers of America on March 7, 2001, then-Federal Reserve Chairman Alan Greenspan said "an unfortunate tendency" among bankers to lend aggressively at peak of the cycle and argued that most bad loans were made through this aggressive type of lending.

In fact, largest banking crisis in last 25 years have occurred following periods of very rapid credit growth. However, not all credit booms are followed by banking crises. In fact, most studies conclude that, while probability of the banking crisis increases significantly (50-75%) during booms, historically, only 20% of boom episodes have ended in the crisis. For example, of 135 identified in credit booms Barajas et al. (2007) preceded the systemic banking crisis only 23 (about 17%), with proportion increasing to 31 (about 23%) if non-systemic episodes of financial distress are included. In contrast, about half of banking crises in sample were preceded by credit booms. Not surprisingly, biggest booms and longer lasting, and coinciding with higher inflation and - to the lesser extent - lower growth, are more likely to end in the crisis. Fast rising booms associated with asset prices and real estate prices are also more likely to end in crisis.

C.Reminiscent of this pattern linking credit booms with banking crises, current mortgage delinquencies in U.S. mortgage market High risk does seem to be related to past credit growth. In the new working paper analyzes data from more than 50 million individual loan applications and find that crime rates increased more in areas that experienced greater increases in number and volume of loans originated (Dell'Ariccia et al., 2008). This relationship is linked to the decline in credit standards, as measured ...