Question

what is the main contributory factors in financial crisis

Answer 1

1. Rating Agencies sometimes ignore the fundamentals and manipulate the rating of certain debt ridden companies by giving higher rating. These companies then can get access to cheaper source of credit which are sourced from banks and other financial institution. Indirectly lot of public and private fund is at risk.
2. Greed is another factor..Sometimes banks and financial institution in order to expand their business and achieve targets lend credit to subprime ( group of borrowers with poor credit worthiness). This happened in the subprime crisis or housing bubble where public money through banks were loaned out to subprime customers. Banks failed and Fed had to bail them out with tax payers money.
3. Weak regulatory systems: Regulators sometimes commit error by liberalizing the market too much in terms of liberalizing interest rates and increasing money supply.
4. Violating Basel Norms by Banks: BASEL norms have recommended a fixed capital to be secured for risk weighted assets so as to absorb unexpected losses. In some case banks fail to maintain the same and that leaves them vulnerable to economic downturn .
5. Valuing assets at market rate rather than historical rate: The 2008-09 crisis was because assets were not valued at market rate which distorted the balance sheet of many companies and resulted into a huge crisis.
   
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