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Role of "securitization" and "structured finance products" in the recent banking and financial crisis - Essay Example
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Author : leannonlawson
Finance & Accounting
Pages 7 (1757 words)
The paper evaluates the role played by the financial innovations such as mortgage-backed securities and other collateralised debt obligations. The institutional investors believing in the working of the mathematical models got approval from regulatory bodies that financial companies should be given freedom in deciding to put on hold the capital to cover risk…
The paper describes the role of securitization and structured finance products in the recent banking and financial crisis. Financial institutions cater to the needs of different types of customers by providing relevant financial services. Financial institutions worldwide have been affected by the adverse market environment created by the US sub prime fiasco. Trouble began when the financial companies started relying too much on the innovation in the blind faith that it will yield returns. As it is common knowledge that banking industry has suffered the most due to the current meltdown, the symptoms of the malaise started emerging in the US mortgage business first. The cracks appeared in the banking system. Housing prices, according to Financial World started falling in the year 2005. Initial symptom appeared in the market for sub prime residential mortgage-supported securities as investment demand shrank in 2006. In February 2007, auctions to finalise rates on ARS instruments failed because of decreasing investor demand. Cracks in financial market became wide open in June 2007 with the failure to meet the lenders’ call on Collateralised Debt Obligations by two Bear Stearns hedge funds for subprime loans.