In essence the banks had gotten too greedy, had a lapse in controls and governance, faced attractive incentives to lend (and credit conditions were very loose).
In addition, a promising new market of customers had a voracious appetite to borrow, and lapped up all the easy credit offered by the banks.
But then the lending boom began to unwind, as borrowers came under pressure from heavy debt loads.
Large amounts of defaults ensued and the very survival of the banking system came into question.
The turn of events highlighted the fragility of the banking system, and the perils of a lack of controls, particularly in an environment of easy credit; and spurred resolve to implement regulatory change to solve the problems and fix the system, and guard against future bubbles and crises.
Fascinating stuff, but what am I talking about? Time for a quiz! Select from the options below of what banking crisis I'm talking about:
- The 2007 subprime mortgage crisis
- The 2008-9 global financial crisis
- The 1997 Asian financial crisis
- The US savings and loan crisis
- The 1980's Third world debt crisis
If you can't guess, watch the documentary here: banking crisis