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Principles of Banking and Finance
Finance & Accounting
Pages 8 (2008 words)
Q 1 The 2007 credit crisis has been attributed to myriad forces: firstly, one of the forces behind the crisis was perverse incentives (Evans13); there are so many instances where incentives played a major role in the making of the crisis. For instance, the sub-prime mortgage sales agents offered low initial repayments in order to attract more clients and be able to earn more incentives; the banks on the other hand were only interested in generating as many mortgages as possible and were not careful to assess likelihood of repayment.
The attractive mortgage lending was based on a faulty premise that the house prices would continue rising, thus over-lending by the banks, in total disregard of the likelihood of repayment. When the false bubble in the mortgage lending finally burst, the financial crisis began taking its toll, many loans were unrecovered by the banks and the banks become bankrupt. The third force behind the credit crisis was global imbalances; the developing Asian exporting countries had large current account surpluses, a situation that has been defined as “global savings glut”. This situation led to an inevitable influx of capital into the US thus leading to the bubble in share prices in the late 1990s, and the bubble in house prices accordingly; however, the US current account deficits kept going up from the 1990s due to offsetting inflows of capital to the US. ...
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