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Executive summary

There are a number of reasons why banks may suddenly increase the costs of borrowing or make borrowing more difficult. In the next report, it should be shown that the main causes of the global credit crunch are sub prime mortgage crises in the US. Analyze the reasons that led to the sub prime mortgage crises and how they precipitated the global credit crunch. In a word, there are three reasons which lead to sub prime mortgage crises. Follow by the report, it should examine and explain the effects these crises, and compare two economies the US and Australia, use data – share prices, interest rates, inflation, unemployment, GDP figures, consumer and business confidence indices, graphs and other like material to support your discussion. Finally, to compare the weekly data on ANZ, CBA, NAB and WBC share prices with the AOI.

Table of contents

1. Part A…………………………………………………………………P4-6

2. Part B…………………………………………………………………P7-13

3. Part C…………………………………………………………………P14-15

4. Reference list…………………………………………………………P16

Task

Part A
What have been the main causes of the global credit crunch which commenced in the US banking industry?

The main causes of the global credit crunch are sub prime mortgage crises in the US. In the US sub prime mortgage market which ‘turned sour by borrowers with poor credit struggling to meet payments as interest rates rise — is fast becoming a global worry. With huge chunks of this debt packaged up and sold to financial companies across the world, bad loans are roughing up banks and markets just about everywhere’(Smith, 2007). Therefore, Sub prime mortgage market was meltdown in USA, it also impact global economics. The sub prime mortgage crisis hits bank sector in the financial market. John Rubino indicates that suffering lost from sub prime mortgage depend on the business model of banks (Rubino, 2007). For the sub prime crises, the problem of cash flow turnover occurred during this period. And Banks lent a large amount of loans to borrower and a lot of payments are defaulted. On the other hand, the pay option of adjustable rate mortgage (ARM) allow borrower who can skip the payment occasionally, and the payment will be added to principal. Therefore, this characteristic caused a large of missed payment in sub prime mortgage crisis. For instance, ‘there was only 75 million dollars in 2005. However, It increased sharply to 654 million dollars in 2006’ (Rubino, 2007). In order to solve these problems which are cash turnover and missed payment. Banks had to sell large number of houses in to a downturn housing market ‘as low price and cut off the part of business which suffered lost in sub prime meltdown’ (Rubino, 2007). In addition, banks tighten the underwriting standard for borrowers in order to decrease the risk of sub prime mortgage market (Krinsman, 2007). It has been discussed above. The sub prime mortgage crisis is a main cause of the global credit crunch.

Analyze the reasons that led to the sub prime mortgage crises and how they precipitated the global credit crunch.

Sub prime Mortgages is one type of mortgages in USA, which ‘Lenders typically make subprime mortgage loans to borrowers with high credit risk, that is, the risk that the borrower will not fully repay the lender’ (Simon. 2001). There are several reasons which lead to sub prime mortgage crises. Firstly, the early payment defaults on mortgage loan in 2006, including sub prime loans which were relatively uncommon. In the midst of the weakening housing market in 2006, many investment banks and other investors in sub prime loans recognize the growing risk of sub prime loans. However, ‘a pronounced rise in early payment defaults on recently originated sub prime mortgages occurred in the final quarter of 2006 and the first quarter of 2007. On the other hand, there are 1.1 million sub...
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