Posts tagged financial crisis

It began with the subprime crisis which is mortgages at variable rates. Today, we’ll talk about it again after a year and a half passed.
There are loans premiums (which are loans at normal interest rates). Subprime loans are loans that were made to poor people. There are risks of non-repayment of these loans, which justified the bank margins slightly higher. However, the risk of officers was more important than the interest rate established.However, the bank took a mortgage on the property, ie that if households could not repay their property, they take their real estate. However, the real estate market continued to grow, thus justifying an interest rate relatively low.
The U.S. government sought the banks to lend to households to access private property.

• Banking Regulation

There was the introduction of prudential regulation. It exists in all OECD countries. The aim is to avoid the bankruptcy of a bank, and especially to avoid the financial difficulties of a bank will result in an inability to repay deposits. If ever a bank can not repay the deposits, it could repay the banks, there is a risk chain.
Indeed, it is necessary that the banks have a level as sufficient to meet the risks they take when they make loans. On the assets of a bank, there are credits but also securities. The idea is to require banks to have capital in excess of the percentage of those assets. (If a bank 100 to his credit, it should be, for example, 5% of its liabilities to assets).
Suppose a bank has 100 to his credit and 100 deposits. If there is a crisis, a bank could repay all of the assets of the bank, then she would get only 50. Indeed, the bank could repay all the depositors .
Suppose there is a prudential ratio of 50%. While the liability side, deposits are 50 and 50 of fons own. Then the bank repay depositors, but the loss to shareholders.
This is the basis of banking regulation to prevent banking crises. (more…)