The 2008 Financial Crisis

 
 
 

Vocabulary

crisis	rescue	collapsing
fail	plus (2)	tax-payer
prop	rule (2)	put in place
risk	require	supervision
ensure	liquidity	sufficient
afloat	deposit	depreciate
critic	impact	capital reserves
strict	interest	balance sheet
boost	comprise	back up (2)
ratio	no longer	savings account
cash	crucially	write that off
profit	reserves	capital (2)
stable	bond (2)	go to plan
loan	default	withdraw
bust	trigger	loan/lent/lent
habit	failure	chain reaction
secure	conclude	give a helping hand
brink	push (2)	pick up the tab (2)

 
 
 
 
 

Video: Financial Crisis of 2008

 
 
 
 

Transcript

Ten years ago, the financial crisis began. Banks failed. And the global financial system looked at risk of collapsing.

Governments came to the rescue of banks, propping them up with tax-payer money.

Could such a thing happen again? Or have lessons been learned?

In the European Union, stricter rules were put in place, under the supervision of the European Central Bank.

They require banks to manage risks better than before, and ensure they have sufficient liquidity to stay afloat. And crucially to boost their capital reserves.

To see why this is so important, take a look at this very simplified example of a bank’s balance sheet:

On one side is the money the institution has lent. If all goes to plan, the bank get all that money back — plus interest.

These loans have to be backed up by sufficient capital. This could comprise deposits, such as personal savings accounts or bonds.

But technically neither belong to the bank. After all, customers can withdraw their cash any time they want. And when bonds depreciate in value, banks write that off.

The bank’s capital, on the other hand, includes profits it previously made.

So what happens during a financial crisis?

If companies don’t pay back their loans, the bank loses capital. It eats the loss. If the bank has enough capital reserves, it remains stable.

By the way, before the financial crisis, the reserve ratio of European banks was only about 1.5%. The European Central Bank’s new rules would increase that figure to fifteen percent (15%). But some critics say it should be twice that.

If a lot of companies default on their loans, banks stand to make huge losses. The bank no longer has enough capital, meaning its customers and business partners’ money cannot be secured, and the bank risks going bust.

The bigger the bank, the bigger the impact its failure has on the whole financial system.

With banks in the habit of lending each other money, one failure could trigger a chain reaction, which is what happened a decade ago.

So what can we conclude?

Governments would likely lend big banks a helping hand again, if a new financial crisis pushed them to the brink.

And that would leave tax-payers to pick up the tab.

 

 

Questions

1. What happened in 2008?

2. As a result of the financial crisis of 2008, changes have been made. True or false?

3. How do banks make most of them revenue?

4. “When bonds depreciate in value, banks write that off.” What does this mean?

5. Has the European Central Bank responded with new rules? What has it done?

6. What triggers or causes a financial crisis?

7. How was the crisis resolved?

 

A. I remembered the Financial Crisis of 2008. Yes or no? How did you and your friends feel? Did it impact you and your family directly?

B. Did you fully understand what had happened? Was it confusing or clear, or you didn’t care?

C. Are there a lot of arguments, debates and disagreements about what had caused the crisis?

D. Will or may something similar happen in the future?

E. How can such crisis be prevented or avoided?