Schroders: The global financial crisis 10 years on

Banks failed, government institutions were bailed out, stockmarkets crashed and countries had to be propped up financially. We are still feeling the effects: low growth, political upheaval, Brexit and even the election of Trump can all be traced back to the crisis.

How the global financial crisis began

It all started with the US subprime mortgage market, the corner of the industry that lent to borrowers with poor credit histories, often with little means to meet repayments. These subprime mortgages were then carved up and repackaged along with traditional mortgages and sold to investors. Convinced that the risk had been spread, what could go wrong?

In the short term it worked, helping maintain a house price boom. In the long-term, it didn’t. A rise in the number of borrowers defaulting was the start. The housing market began to fall and those mortgage investments which had been repackaged became toxic. Worst of all, no one knew who held the bad debts. Banks, therefore, became wary about of lending to each other. The world stood on the brink.

A seminal day at the start of the crisis was 9 August 2007, when the danger of systemic risk became apparent. French bank BNP Paribas suspended three funds exposed to the US mortgage market. It blamed a “complete evaporation of liquidity”. Here we briefly re-live the main events, look at what has happened in markets since and what it means for investors.

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