Financial crisis: The role of excessive leverage in the financial industry and the implications

Hans Henrik Duus Gebauer Christensen

Studenteropgave: Kandidatafhandlinger


This thesis describes the main events in the current crisis that has evolved since mid 2007. At the beginning it was an apparent isolated crisis in the subprime market, later it evolved into a liquidity crisis threatening financial institutions to bow under because of lacking liquidity. It then became a financial crisis causing large credit losses and defaults among large financial institutions before it spread into a severe economic crisis for especially the western world, causing recession and dramatically rising unemployment rates. The first part of the thesis concentrates on explaining the significant catalysts in the crisis, the factors that can explain why it went so wrong. The focus is on the US, the UK and the EU financial industries. The catalysts are the savings glut, the loose monetary policies conducted by central banks in the North Atlantic region, the shadow banking industry with its highly leveraged off balance sheet entities, the transaction processes that has developed into securitization, monoline insurance industries and rating agencies. The thesis also describes authorities’ role, the financial regulations that have shown to be insufficient as well as it examines the behaviour of the market participants, especially moral hazard which is a recurring theme in many of the catalysts. The thesis discusses the massive rescue plans and rescue packages that central banks and governments have provided to the financial industry since the crisis emerged. A large nationalization process has been conducted in order to save large financial institutions from default. The incentives for rescuing privately owned institutions with tax payers money is discussed and it is clear that some large financial institutions have been and still are systematically important and therefore too big to fail. It is in the society’s interest to save these large institutions in order to restore financial stability. Exit strategies from the government financed rescue packages are high on the political agenda at this point of time (medio September 2009), and the strategies for these are also discussed. It is evident to secure a smooth and sensible withdrawing of the subsidies in order to avoid new shocks to the financial markets. The financial regulations are discussed as well – it is crucial to enhance the regulations to prevent a repetition of the crisis. An excessive level of leverage are, without doubt, a significant reason of why the crisis evolved as severe as it did, and it is therefore crucial to tighten capital requirements in order to deleverage the financial industry.

UddannelserCand.merc.ib International Business, (Kandidatuddannelse) Afsluttende afhandling
Antal sider75