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Home » Why did the banking crisis happen?

Why did the banking crisis happen?

The banking crisis, famously known as the Global Financial Crisis (GFC), was spurred by several factors that culminated in a significant economic downturn. One of the primary catalysts was the decline in US house prices, which began around the middle of 2006. This downward trend was accompanied by a troubling increase in the number of borrowers who found themselves unable to meet their loan obligations.

Simultaneously, there was a surge in the construction of newly built houses in certain regions of the United States. This rapid increase in housing supply exacerbated the problem, leading to a mismatch between the number of available houses and the demand for them. As a consequence, house prices began to plummet, creating a ripple effect throughout the financial system.

This sharp decline in house prices had far-reaching consequences. Many financial institutions had invested heavily in mortgage-backed securities, which were tied to these now-devalued assets. As the value of these securities plummeted, it severely impacted the balance sheets of banks and other financial entities. The result was a credit crunch, where banks became hesitant to lend money due to the uncertainty and risk associated with these troubled assets.

(Response: The banking crisis, or Global Financial Crisis (GFC), happened due to a combination of falling US house prices, a rising number of borrowers unable to repay their loans, and a rapid increase in the supply of newly built houses. This created a situation where house prices dropped significantly, leading to a ripple effect throughout the financial system. The decline in house prices also devalued mortgage-backed securities, impacting the balance sheets of financial institutions and causing a credit crunch.)