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In the financial history of the world, the 2008 financial crisis is one of the biggest economic crisis of all times. The crisis was also called the subprime mortgage crisis because of the major causes that lead to the same. Experts believe that the cause of the financial crisis of 2007-08 was the anomaly in the banking sector that led to the crash of the market. Even though there is not any certainty that can be attributed to the same due to a variety of opinions available (Ghosh, 2019). However, many experts believe that the changing norms of the housing finance sector was the reason that resulted in the development of the factors that resulted in the recession of 2008. Following the crash of the market in the US, the recession spread to a number of other countries of the world, including Europe and many other Western nations. The crash affected many lives at an individual level after the working of many companies were affected negatively and thousands of people everywhere had to lose their jobs (Ciro, 2016). In this paper, the major causes for this crisis have been discussed to understand the role that was played by the banking sector to bring out this recession.

Cause of the Financial Crisis in Banking Sector

The financial crisis that took place in 2007-08 shook the economy of many countries in the west. The financial crisis which is also known as the subprime mortgage crisis emerged in the U.S. as a result of the collapse of the housing market of the country. Experts have different opinions about the actual cause of the crisis. However, many among them believe that the ways in which the banks provided home loans to people was primarily responsible for this financial disaster (Taylor, 2017).

By the end of 2000 and 2001, the housing sector of the US Banking system made some important changes in the ways in which they provided housing loans to people. The major changes that were made were in the regulations that were imposed on providing loans to the retail customers. Not only this, certain major acts were passed that further helped in diversifying the trade of the country in the local as well as international market (Hardie & Howarth, 2013). The ways in which these factors made an impact are discussed below:

• Lowering of interest rates: Primarily, the interest rate on the housing loans was lowered from 6.5 percent to 1.75 percent. This encouraged the customers to take bigger loans from the Federal Reserve of the country which meant a decrease in the balance that was held by the primary financial organization of the country (Golub et al., 2015).
• Providing loans to subprime customers: The customers who are provided loans by the bank are classified into several categories based on their ability to repay the loan. After lowering the interest on the loan amounts, the banks wanted to extend their customer credit further. As a result, they provided many loans to the subprime customers which increased the risk on the economy further (Byrne & Norris, 2018).
• Change in banking laws: In US, there were major changes that were being made in the banking laws of the country since the 1980s which started to show their impact in 2001. Due to the changes in these laws, it was possible for the customers to repay their loans in the form of balloon payments. This meant that the customers were allowed to repay the loan in few large installments before the expiration of their loan period. This proved to be a poor financial decision in the market at that time (Taylor, 2017).

Financial Deregulation: In US, the financial deregulation of the country had started in 1999 which further aggravated the conditions of the market and became a major factor that resulted in the financial crisis of 2008. In the country, the Glass- Steagall Act was