Explanation:
The crisis was triggered by losses on subprime mortgages, which were amplified to other credit markets. The banks began experiencing huge losses and liquidity problems coupled with uncertainty in the computation of credit assets. Consequently, banks stopped lending to each other. Governments around the world tried to recapitalize their insolvent banks to revive lending. Eventually, numerous banks collapsed or were taken over.
Option A is incorrect: The emergence of profitable instruments, if well regulated, could not have led to the crisis.
Option B is incorrect: Regulations were there, however, most of them were ignored.
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Q.96 Since the Great Depression, there has been a lot of research to establish the historical causes that lead to major financial crises, including the one that happened in 2007-2009. Which of the following was the major cause of the 2007-2009 financial crisis?
A
The emergence of new financial instruments offering higher profits compared to traditional investments.
B
A lack of government regulation of financial markets.
C
Losses on subprime mortgages.
D
None of the above.