The global financial crisis (GFC) refers to the period of extreme stress in global financial markets and banking systems between mid 2007 and early 2009. During the GFC, a downturn in the US housing market was a catalyst for a financial crisis that spread from the United States to the rest of the world through linkages in the global financial system. Many banks around the world incurred large losses and relied on government support to avoid bankruptcy. Millions of people lost their jobs as the major advanced economies experienced their deepest recessions since the Great Depression in the 1930s. Recovery from the crisis was also much slower than past recessions that were not associated with a financial crisis. Regulation and policy errors were one among the main reasons behind the GFC. Regulation of subprime lending and MBS products was too lax. In particular, there was insufficient regulation of the institutions that created and sold the complex and opaque MBS to investors. Not only were many individual borrowers provided with loans so large that they were unlikely to be able to repay them, but fraud was increasingly common such as overstating a borrower's income and over-promising investors on the safety of the MBS products they were being sold. The GFC unfolded with fall in the US house prices, missed repayments, financial system stresses, spillovers to other countries, failure of financial firms and panic in financial markets. Policy responses included lower interest rates, increased government spending and stronger oversight of financial firms. (Source: Reserve Bank of Australia).

Required You are required to analyse the role of various banking and non-banking financial institutions in causing the GFC. In particular the analysis should include:

The rationale behind the overexposure of banks to the housing sector

Failure of regulatory institutions in controlling the overexposure to one sector

Aftermath in bundling and reselling of these loans