Bank Risk and the 2008 Financial Crisis
Bank Risk and the 2008 Financial Crisis

Author(s): Fernando Baraza
Subject(s): Politics / Political Sciences, Politics, Economy, Supranational / Global Economy, Business Economy / Management, Economic policy, Financial Markets
Published by: Университет за национално и световно стопанство (УНСС)
Keywords: crisis; regulation; leverage; subprime
Summary/Abstract: The 2008 global financial crisis exposed severe structural weaknesses in the international monetary system, including deregulation, excessive leverage, and flawed risk management practices. Originating in the U.S. housing market, the crisis spread rapidly through securitized products such as MBSs and CDOs, whose risks had been underestimated due to overreliance on quantitative models and inflated credit ratings. Risk models, such as Value-at- Risk, failed to capture extreme events and systemic interconnections, while highly leveraged institutions became vulnerable to even small declines in asset values. When the housing bubble burst, liquidity evaporated, interbank markets froze, and fire sales intensified losses, eventually leading to the collapse of major institutions such as Lehman Brothers. The resulting contagion triggered global economic disruption, including sharp declines in trade and widespread financial instability. In response, governments and central banks implemented large-scale interventions, including TARP, emergency liquidity facilities, and coordinated monetary easing. Post-crisis reforms such as Basel III sought to strengthen capital, leverage, and liquidity standards, while improvements in governance and risk culture aimed to reduce excessive risk-taking. Overall, the crisis highlighted the need for robust macroprudential regulation and more resilient financial institutions.

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