world financial crisis of 2008 - The Causes of the Global...

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1[49] The Causes of the Global Financial Crisis and Their Implications for Supreme Audit Institutions
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3[49] Preface Last year, INTOSAI commissioned a Task Force which was assigned to draw conclusions from the financial crisis that hit the world economy in 2008. At its first meeting in Washington D.C. 29 June 1 July 2009, the Task Force decided to divide its work into four subgroups. The task of Subgroup 1, chaired by the Swedish National Audit Office, was to describe the causes of the crisis and lessons learned. This report is the result of the joint effort made by all members of the subgroup, which include representatives from the SAIs of Canada, Cyprus, Estonia, Finland (observer), Japan, Republic of Korea, Saudi Arabia, USA, the United Kingdom, Venezuela and the European Court of Auditors. The subgroup’s analysis and conclusions in this report aim to give an informative background to the crisis and from this analysis draw policy conclusions for SAIs. Since the work of the subgroup started, financial markets have recovered from the severe instability of 2008 but also been hit by new challenges to financial stability and public policy. These new developments do not contradict the conclusions in the report. On the contrary, they seem to validate them and may indeed serve as a relevant starting point for further discussion. Claes Norgren Auditor General of the Swedish National Audit Office Stockholm, October 2010
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4[49] Outline Summary ........................................................................................................ 6 Chapter I The anatomy of the crisis ............................................................... 8 Box 1 Development the of crisis US ..................................................... 14 Box 2 Development of the crisis Europe .............................................. 15 Box 3 Development of the crisis Asia ................................................... 16 Chapter II. Causes of the crisis .................................................................... 17 Macroeconomic causes ............................................................................ 17 Low inflation and low interest rates ..................................................... 17 Higher risk taking ................................................................................. 18 Growing imbalances ............................................................................. 19 Failure to address the financial cycle ................................................... 20 Financial market causes ........................................................................... 21 Financial innovations increased complexity ........................................ 21 System-wide risks underestimated ....................................................... 22 Inadequate risk management ................................................................ 23 Credit rating agencies failed to evaluate risks ...................................... 23 Remuneration systems spurred risk taking .......................................... 24 Banks circumvented capital requirement regulations .......................... 24 Procyclical credit conditions ................................................................ 25 Policy implementation and regulatory failures ........................................ 26 Government policies lowered credit control ........................................ 26 No one responsible for or understood system-wide risks .............. 26 A lack of international harmonization and coordination ...................... 27 Supervisors did not understand risks or that banks by-passed capital requirements ......................................................................................... 28 Winding up procedures for banks ........................................................ 29 Governments guarantee the financial system ....................................... 29 Summary .................................................................................................. 30 Chapter III Lessons from past and current crises ......................................... 32 General characteristics ............................................................................. 32 The Boom-period ................................................................................. 32 Trigger events ....................................................................................... 33
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5[49] Policy response ..................................................................................... 33 What was different this time? .................................................................. 34 Why the impact differed so much between countries .............................. 35 Summary .................................................................................................. 38 Chapter IV Conclusions and implications for SAIs ..................................... 39 Audit of sustainability of public finances ................................................ 39 Audit of governments’ implicit guarantees .............................................. 40 SAIs’ role in promoting accountability for financial stability ................. 41 A need for international coordination and cooperation ............................ 42
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