Government Policy, Banks’ Strategies and the Financial Crisis: Contagion Through Interconnectedness

Abstract

The catalyst for the financial crisis that commenced in 2007 was a decline in residential property values in the US following significant inflation, a sector to which banks had been increasingly lending and had widened their market to include lending to non-prime customers often through non-bank intermediaries. These financial assets were distributed and securitised and acquired by financial and institutional investors in many different countries. It is argued that banks’ strategies were in response to government policies and demand from global investors. There was an effect on financial markets and economies and also on financial institutions. One particular bank was Northern Rock which had to be nationalised by the government due to the unsustainability of its funding model. The focus of this article is to determine and assess the conditions, causes and catalyst for the financial crisis.