Discussed in this essay will be key factors that played in the development of the financial crisis of 2007, an overview of the causes and instruments used to the build up and possible preventions, followed by the influences from the government, if any that had an underlining effect toward the outcome.
The Involvement Of New Bank Innovations
Bank capital has a massive influence on the banking system effecting loan defaults, profits and lending, although the amount of outstanding lending has not decreased appropriately in early 2007, not being due to new lending but the previous loan commitments, lines of credit and securitisation. 1. New innovations have allowed banks reliant on funding market sources, with the rise in the covered bond market and the increase in securitisation made banks dependant on capital markets and less dependant on expanding their loan base allowing banks to easily switch deposits to other forms of financing, acquiring funds from affiliates for example. 2
Growth in securitisation activity created a lack of incentive for banks to grant credit and comply with monetary policy changes, an unregulated approach to the screening of borrowers, checks would assume securities passed through the market allowing borrowers in the past declined credit being able to qualify and later on would lead to greater default rates on loans.
Thinking that by selling the pool of mortgages banks are also passing on the risk, they exposed themselfs , their underwriting issuances, when the market collapsed banks suffered great losses with their related products, by the start of 2008 CDO related write downs and credit losses had reached $181 billion the massive decline lead to more cautious investors, greater liquidity demand and declining stock, this resulted in massive losses to the bank and securities firms, an example would be the collapse of Bear Stearns and Lehman Brothers using these examples shows how complex the system was and lead to the decline of...
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