Financial production and the subprime mortgage crisis

The article presents a symposium discussion assessing the role the sociological and geographical aspects of the mortgage market played in the 2008 financial crisis. Combinations of interrelated causes of the global financial crisis include deregulation and re-regulation, financialization and globalization, and bubbles and wrong incentives. The various ways the mortgage market is shaped and reshaped by both mortgage lenders and state institutions is examined. It is stressed that mortgage loan securitization is largely an invention of government and government erected institutions such as Fannie Mae and Freddie Mac.

Inclusion of persons with disabilities in financial products and services has been identified as an important step on the pathway to achieving the sustainable development goals. Evidence of how people with disabilities are included in financial products and services including strategies to improve their inclusion in low and middle-income countries is limited. We draw on qualitative data to to understand the experiences of providing and using financial products and services from the perspectives of persons with disabilities and representatives of different financial institutions in Nairobi and Migori counties of Kenya. Eighty-one persons with disabilities (49.4% <35 years, 57% female) were purposively sampled to take part in 10 focus group discussions. Additionally, 26 in-depth interviews were conducted with financial institution representatives. Data were collected between July and September 2022 and analysed thematically. Participants described a mixed picture, sharing experiences of different levels of inclusion, and examples of exclusion from different types of financial services and products. Despite good intentions, financial institutions lacked the knowledge and skills required to adapt existing financial products and services, and marketing strategies for different needs and to improve the accessibility of products and services for persons with disabilities. The findings highlighted a need for staff training and establishing institutional policies and guidelines to support the inclusion of persons with disabilities. Persons with disabilities reported embracing digital financial services and constitute a large untapped market for the financial institutions who are able to provide accessible products and services. Multi-stakeholder approaches are needed to increase disability awareness, develop and enforce policies and guidelines as well as collection of disability-disaggregated data to promote financial inclusion for persons with disabilities in Kenya.

PurposeThe present study examines the linkage between financial literacy and financial fragility during COVID-19. It further examines if financial literacy has a differential impact on financial fragility based on psychological (financial confidence), economic (wealth) and social (race) factors.Design/methodology/approachThe authors used nationally representative data of the American working age-group. They collated six different datasets collected at different time-periods to conduct the present study. Based on 2,202 observations, they conducted logistic regression analyses to test the proposed relationships.FindingsThe authors find that financial literacy reduces the odds of being financially fragile by 9.1%. Furthermore, they find that financially literate consumers having high financial confidence are less financially fragile during COVID-19. Besides, the adverse impact of financial literacy on financial fragility is more for consumers having more than less wealth. The interaction with race is not significant, suggesting that financial literacy cuts across racial boundaries.Practical implicationsFinancial fragility is an important factor having numerous deleterious consequences. The authors’ study found that financial confidence, psychological factor and wealth economic factor enhances the negative effect of financial literacy on financial fragility. Banks and financial institutes can develop mechanisms to infuse confidence in individuals during the pandemic to reduce their financial fragility. Policymakers and governments may increase awareness related to debt management practices and design financial literacy interventions to reduce financial fragility among individuals.Originality/valueThe study is one of the initial studies to examine the antecedents of financial fragility. Based on a time-lagged data, the authors’ study examines the linkage between financial literacy and financial fragility. Though scholars have investigated financial literacy and its implications, scholarly work in this domain during COVID-19 is at best limited. The study contributes to the literature by testing the effects of boundary conditions that can change financial literacy's impact on financial fragility.

PurposeThis article provides the first empirical study on the effects of the COVID-19 pandemic on sustainability reporting in US financial institutions using institutional, stakeholder and legitimacy theories.Design/methodology/approachThe study used the independent sample t-test and Mann–Whitney U test throughout as well as OLS, random effects, fixed effects and heteroskedasticity corrected model to test the impact of the COVID-19 pandemic on sustainability reporting in the US financial sector. A sample from all listed US financial firms was used after controlling for both the Refinitiv Eikon sector classification and the NAICS sector classification.FindingsUsing U Mann–Whitney test and independent sample t-test the study revealed that the average ESG score for the pre-COVID19 period is 53% compared with 62.3% for the COVID-19 period, indicating that the sustainability reporting during COVID-19 is much higher compared with the pre-pandemic period. The findings of regression analysis also confirm that the US financial companies increased their sustainability reporting during the COVID-19 pandemic.Research limitations/implicationsThis study is an early attempt to look at how the COVID-19 epidemic has affected financial reporting procedures, although it is focused only on one area and other entity-related factors like stock market implications, company governance, internal audit practice, etc could have been considered.Practical implicationsThis research offers useful recommendations for policymakers to create standards for regulators on the significance of raising sustainability awareness. The findings are crucial for accounting regulators as they work to implement COVID-19 and enforce required integrated reporting rules and regulations.Originality/valueThe study provides the first empirical evidence on the impact of the COVID-19 pandemic on sustainability reporting, by examining how US financial institutions approach the topic of sustainability during the COVID-19 pandemic and assessing the pandemic's current consequences on sustainability.

When do regulatory subsidies become regulatory burdens? That question is central to the debate over financial regulatory reform in the US. The prevailing wisdom among advocates of deregulation is that US financial regulation, although in many cases originating as subsidy, now imposes significant burdens on US financial institutions that have disadvantaged them when competing in global markets. For example, US regulation has kept financial firms small and specialized in a world in which diversified universal banks dominate; as a result, many US financial institutions may lack the size necessary to compete in global markets. US financial firms have proved skillful at using innovative legal structures to evade regulatory restrictions, but the high transactions costs associated with this strategy eventually may take their toll on the US financial industry, injuring its competitive position.KeywordsFinancial MarketFinancial InstitutionFinancial RegulationSecurity MarketRegulatory ReformThese keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

The Global Financial Crisis of 2007-2009 wreaked havoc in world financial markets and almost brought down the global financial system. One of the consequences of the crisis is the large number of borrowers currently struggling to repay loans that were advanced to them largely as a result of irresponsible lending.In the run-up to the crisis a number of factors, such as flawed monetary policy, excessive liquidity and the misuse of financial innovations led to a deterioration of risk controls and standards for the extension of credit, particularly with regard to sub-prime mortgage loans. Financial innovations such as securitisation, structured finance and credit derivatives provided incentives for irresponsible lending, since they allowed loan originators to transfer the risks associated with their loan portfolios to investors in asset-backed securities throughout the global financial markets. The lowering of standards for the extension of credit led to asset price bubbles in several countries, with the most significant of these being house price bubbles in the US and the UK. This was largely fuelled by sub-prime mortgages advanced to borrowers who could only afford to keep up their mortgage repayments if house prices continued rising, thus allowing them to refinance at lower interest rates in the future. When the house price bubbles burst and house prices stopped rising, these borrowers started defaulting in huge numbers and this caused widespread panic in the global financial markets and almost brought down the global financial system.In the aftermath of the crisis, much of the discussion on how to prevent, or reduce the effects of, future financial crises, has centred on dealing with the risks to the financial system rather than the protection of vulnerable borrowers and users of financial products. The focus has been on improving the prudential regulation of the banks through such measures as increased capital adequacy requirements and the question of how to tackle the problem of large, systemically important banks that are considered too big to fail. In comparison, very little attention has been paid to addressing the consumer protection issues which were thrown up by the mis-selling of sub-prime mortgages to borrowers who could not afford them. This is despite the fact that the default by these borrowers was one of the key tipping points in the unfolding of the financial crisis.This paper examines the proliferation of sub-standard retail financial products such as sub-prime mortgages and payday loans. It analyses the factors that contributed to the innovation and diffusion of these products. It looks at some of the patterns in the development and marketing of retail financial products for the less affluent members of society. It also explores the effects that the proliferation of sub-standard retail financial products have on the economy, society, communities and the individual users (consumers) of such products. In doing so, it looks at the economic, political, legal and ethical issues that arise with the diffusion of such financial products. It is only through a good understanding of these products and their effects that we can have a meaningful debate on how best to deal with the consequences of the proliferation of such products.

The credit crunch of 2007: what went wrong? Why? What lessons can be learned?

We assess the efficacy of market-based systemic risk measures that rely on US financial firms’ stock return comovements with market- or sector-wide returns under stress from 1895 to 2023. Stress episodes are identified using corporate bond spread widening and narrative dating, spanning from the Panic of 1907 to the Banking Stress of 2023. Measures observed prior to the onset of stress episodes predict market outcomes (realized volatility and returns), balance sheet outcomes (lending, profitability, and run risk), and bank failures. Specifically, the measures are: ( a ) particularly effective in capturing the cross-sectional ranking of institutions conditional on a stress episode, rather than aggregate outcomes; ( b ) more informative when stress episodes are severe; and ( c ) relevant for both banks and nonbank financial institutions, although measures incorporating market leverage are especially informative for banks. A comparative analysis shows that market-based indicators offer information that is distinct from, and complementary to, traditional balance sheet metrics used in supervisory and macroprudential risk assessment.

The objective of this paper is to explore how novel financial datasets and machine learning methods can be applied to model and understand financial products. We focus on residential mortgage backed securities, resMBS, which were at the heart of the 2008 US financial crisis. These securities are contained within a prospectus and have a complex waterfall payoff structure. Multiple financial institutions form a supply chain to create the prospectuses. To model this supply chain, we use unsupervised probabilistic methods, particularly dynamic topics models (DTM), to extract a set of features reflecting community (topic) formation and temporal evolution along the chain. We then provide insight into the performance of the resMBS securities and the impact of the supply chain communities through a series of increasingly comprehensive models. First, models at the security level directly identify salient features of resMBS securities that impact their performance. We then extend the model to include prospectus level features and demonstrate that the composition of the prospectus is significant. Our model also shows that communities along the supply chain that are associated with the generation of the prospectuses and securities have an impact on performance. We are the first to show that toxic communities that are closely linked to financial institutions that played a key role in the subprime crisis can increase the risk of failure of resMBS securities.History: Olivia Sheng served as the senior editor for this article.Funding: This research was partially supported by National Science Foundation [Grant CNS1305368] and National Institute of Standards and Technology [Grant 70NANB15H194].Data Ethics &amp; Reproducibility Note: No data ethics considerations are foreseen related to this article. The code capsule is available on Code Ocean at https://doi.org/10.24433/CO.8845455.v1 and in the e-Companion to this article (available at https://doi.org/10.1287/ijds.2020.0006 ).

The purpose of the study is to evaluate the determinants of financial inclusion in Egypt. Specifically, the present study seeks to determine whether access to financial services, usage of financial service, and knowledge levels of the financial services have determined financial inclusion in Egypt. The descriptive research design has been adopted while targeting 470 managers in commercial banks operating in Egypt. All questionnaires have been returned fully answered and fit for analysis. Going by the descriptive and inferential statistics on the use of financial services, it is evident that a large number of consumers in Egypt have integrated different financial products and services in their consumption process. In respect to this, the availability of different financial services and products influences the consumption of financial services. The research study further underlines the centrality of religion in influencing consumption of financial services in Egypt. Concerning this point, it is imperative for financial institutions to consider integrating religious principles in designing financial products and services in increasing consumption of financial services amongst consumers. There is also a significant effect of knowledge levels of financial services and consumption. The findings of this study reveal that despite the high rate of uptake of different financial services and products, it is imperative for financial institutions in Egypt to consider diversifying their financial products and services. The study recommends that financial firms should develop diversified financial products in order to align with the customers’ needs. Amongst the financial products and services that should be developed relate to banking and insurance products.

This study examines the association between fair value measurements and the cost of equity capital under different fair value valuation methods, and assesses the impact of corporate governance on this relationship for US financial firms. We find that firms’ cost of equity capital is negatively associated with more verifiable fair value assets and positively related to less verifiable fair value assets. Furthermore, the positive association between less verifiable fair value assets and the cost of equity capital is mitigated under better corporate governance. The differential impact between more and less verifiable assets becomes smaller for firms with stronger governance. Our findings contribute to the ongoing debate on fair value regulation by investigating the economic consequences of adopting Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS 157) and the importance of audit committee financial expertise on fair value reporting. We also provide evidence on the importance of board independence, internal control strength, auditor industry specialists, and audit committee financial experts in fair value reporting.

As the world economy entered into its worst crisis since the Great Depression of the 1930s, both claims were proven utterly wrong. The present crisis emerged on the back of an intrinsically unsustainable global growth pattern. This pattern was characterized by a strong consumer demand in the United States, funded by easy credit and booming house prices. Far-reaching financial deregulation facilitated a massive and unfettered expansion of new financial instruments, such as securitized sub-prime mortgage lending, sold on financial markets worldwide. This pattern of growth enabled strong export growth and booming commodity prices benefiting many developing countries. Growing United States deficits in this period were financed by increasing trade surpluses in China, Japan and other countries accumulating large foreign-exchange reserves and willing to buy dollar-denominated assets and fuelling mounting global financial imbalances and indebtedness of financial institutions, businesses and households. In some countries, both developed and developing, domestic financial debt has risen four-or fivefold as a share of national income since the early 1980s. This rapid explosion in debt was made possible by the shift from a traditional “buy-and-hold�? banking model to a dynamic “originate-to-sell�? trading model (or “securitization�?). Leverage ratios of some institutions went up to as high as 30, well above the ceiling of ten generally imposed on deposit banks (cf. United Nations 2009a). In the context of a highly integrated global economy without adequate regulation and global governance structures, this risky pattern of financial expansion implied that the breakdown in one part of the system thus would also lead to failure elsewhere. It is this systemic failure we are witnessing today. The deleveraging now under way has brought down established financial institutions and led to the rapid evaporation of global liquidity affecting the real economy in developed countries and developing countries are being hit through collapsing global trade, plunging commodity prices and reversals of capital flows, thus falsifying the “decoupling�? hypothesis. Until September 2008, all parties seemed to benefit from the boom, particularly major financial institutions in developed countries, despite repeated warnings, such as those highlighted in successive issues of the United Nations’ World Economic Situation and Prospects (2006b, 2007b, 2008b, 2009a, 2009b), that mounting household, public sector and financial sector indebtedness in the United States and elsewhere, and reflected in wide global financial imbalances, would not be sustainable over time.3 The interconnectedness of excessive risktaking in financial markets with the problem of the global imbalances, vast dollar reserve accumulation (especially in parts of the developing world), volatile commodity prices and declining trends in productive investment explain why this crisis is systemic and worldwide. This global growth pattern dictated by the US consumer, the Chinese businessman and the international financier has produced very uneven and unbalanced results. Some big developing countries, notably China, India and some other emerging market economies, have seen strong growth accelerations. Most recently, also low-income countries saw substantial average welfare improvements, epitomizing what might be seen as the “rise of the rest�? (Amsden 2001).

Discussion

This study examines the Aceh Government’s authority in converting conventional financial institutions into Sharia-compliant entities under Aceh Qanun No. 11 of 2018 and evaluates its practical implementation. Employing a normative legal research approach, the study analyses statutory regulations, legal principles, and doctrinal interpretations while incorporating historical context and relevant precedents. The findings confirm that the Aceh Government is legally mandated to oversee this financial transformation. However, several critical challenges impede its execution, including inadequate infrastructure, limited Sharia-compliant financial products, restricted access to Sharia banking capital, minimal adoption by non-banking financial institutions, and low financial inclusion. Among these, the lack of financial infrastructure and product diversity emerge as the most significant obstacles. To enhance the effectiveness of this transition, strategic interventions are necessary. These include expanding Sharia banking infrastructure, introducing diversified and innovative financial products, facilitating broader capital access for Sharia-compliant financial institutions, and strengthening financial literacy programs. A multi-stakeholder approach, integrating government agencies, financial institutions, and the community, is essential to establishing a robust and sustainable Sharia financial system in Aceh.

Financial fragility and over-the-counter markets