The impact of the global financial crisis 2008 on the European banking sector

Research Paper (undergraduate) from the year 2023 in the subject Economics - Macro-economics, general, grade: 1,3, University of Applied Sciences Essen (BWL II), course: Economics, language: English, abstract: The period between the financial crisis at the beginning of the 21st century and the global financial crisis in 2008 was a boom phase. During such the GDP in the European Union doubled, the housing market saw a steep increase in demand and pricing which was supported by a significant increase in private debts. Especially during this period banks used the principle of securitization to pool illiquid loans and make them tradeable in forms of Asset-Backed Mortgages. Such normally were handled by Special Purpose Vehicles, a special business entity created only to handle specific assets and therefore remove such from the banks own balance sheet. The securitization market as well saw an extreme increase in traded volume. Important to note is here that such products were mostly used by banks as collateral in the interbanking market. With increasing interest rates in the United States and EU, a high number of loans with variable interest rates and therefore increasing fault rates the ABS became more and more of a risk whilst the housing market cooled down. The financial crisis swept from the USA to EU because ABS are traded globally. As the trust in the ABS used as collateral was lost due to the issue evaluating the quality of the ABS correctly the interbanking market came do a sudden stop and the market became illiquid. The support of the ECB and the national institutions was necessary to provide sufficient liquidity to the financial sector to avoid a collapse of the whole system. Nevertheless, the consequences of the financial crisis in the EU were that sovereign debts increased significantly leading further into the European debt crisis. Besides rules and regulations were tightened to avoid such crisis in the future and additional costs to the taxpayers.