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3.2. Overview of the Recent Financial Crisis 
For most people, the global financial crisis was something 
they could not predict or even imagine. Ben Bernanke, 
chairperson of the FED after the crisis began, stated that 
“only a very, very few people could appreciate the bubble” 
(FCIC, 2011, p. 3). Also, Allan Greenspan, told to the same 
committee that “it was beyond the ability of regulators ever 
to foresee such a sharp decline (FCIC, 2011, p. 3). On the 
other hand, they were clear signals that the crisis was just a 
matter of time. Few months before the beginning of the 
crisis, total credit offered by banks was 1.5 times highest than 
the banks’ deposits (Merrouche & Nier, 2010). Also, credit to 
households in the USA had a record high of 100% of GDP, 
while loans to business were at almost 70% (Gualandri et al., 
2009). Banks and other financial institutions, especially in 
the US, were widely using Asset Backed Securities (ABS), 
which, before the collapse were almost 90% of all securities 
issued. Due to deregulation, banks could use any kind of 
financial products, so many banks decided to use over-the-
counter derivatives (Dodd, 2008), underestimating the risks 
of these instruments. Here, we have to underline that, the 
deregulation of the banking sector took place in the last years 
of the 1980’s (Sherman, 2009) and, although this 
deregulation resulted in the stock market crash of 1987, 
governments in the US and Europe decided a further 
deregulation of banks. At the same time, central banks chose 
to follow the policy of low-interest rates, allowing banks to 
borrow money, easy and at low cost and, in their turn, they 
were providing home loans. Subprime mortgages, which 
were 9% of total housing in 2003, grew to the 24% in 2007 
(FCIC, 2011). Many households, which under normal 
circumstances they would not be accepted by banks to take a 
home loan took a loan without the ability to handle it. Banks 
provided loans which only guaranteed the expected increase 
in housing prices and attracted customers with low-interest 
rates, without informing these customers that these low-
interest rates were only for a two years and, after this period, 
customers would have to pay a higher interest rate.
Also, through the practice of securitization, banks were 
making a risk transfer and, at the same time, were having, 
even more, liquidity to offer more loans. The transfer of risk 
from banks to the public and investors through the 
securitization was a common practice. This transfer of risk 
allowed banks to lend almost everyone, despite their ability 
to repay the loans. 
Regarding how much longer the system could grow only 
by the promise of rising housing prices and how much longer 
banks could borrow money through securitization, capital 
markets started to freeze. This led to contagion, since not the 
banks, nor the Special Purpose Vehicles (SPVs), which are 
firms specialized in the securitization) could not convince 
new investors to buy their products, so loan refinancing 
activity was very difficult. This resulted to bankruptcies of 
companies, and a huge drop in housing prices, thus, this led 
to bank failures. Thus, central banks made interventions, in 
order to rescue banks. 
The financial crisis that began in the US in September 
2007 was the result of many factors. For example, some 
authors believe that the beginning of the current economic 
crisis may be related to the low-interest rate policy adopted 
by the Federal Reserve and other central banks of G20s after 
the collapse of the stock market bubble in technology in 2001 
(Hayford and Malliaris, 2010). On the other hand, Jawadi and 
Arouri (2011) argue that the economic crisis has its roots in 
many macroeconomic factors, which are closely linked with 
the strategies followed by FED. 
The major issue in the function of the banking system is 
that in periods of economic growth banks provide a high 
percentage of their capital to loans, and also, they are also 
lending capital, either from the central bank of the interbank 
market in order to provide new loans. However, in order to 
gain a higher share in the loans market, banks do not always 
follow a strict risk management procedure, and they provide 
loans to parties which don’t have the proper guarantees. So, 
these new loans result in higher demand for assets, creating 
the conditions of a bubble (Gourinchas and Obstfeld, 2012; 
Schularick and Taylor, 2012). As Carvallo & Parliacci (2014) 
note, the bubble in the real estate was a result of this lending 
policy of banks. A further critic is that, as Bordo & Jeanne 
(2002) note, while in periods of an economic growth banks 
are providing even higher loans, creating a bubble, in periods 
of a lower growth banks are decreasing to the lower levels 
the provision of new loans, creating the conditions of a 
recession. This is, in fact, a key issue of this study: the 
identification of other sources of financing for new 
enterprises, since Greek banks, after 2009, have dramatically 
decreased the provision of loans to enterprises.