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Finance & Accounting
Pages 9 (2259 words)
FINANCIAL CRISIS 1- After reviewing the case and our discussion in class, what events led to the 2008-2010 financial crises? The origin of the financial crisis was the set of government policies that encouraged ownerships for new homes, easy access to sub-prime lending, faulty trading practices on behalf of buyer as well as sellers, prioritization of short term lending over long term lending, and most importantly the lack of adequate capital base in banks that made their solvency vulnerable.
There were already reports of rising default on subprime mortgages that further fuelled quickly thereafter. Such mortgages are usually given to borrowers with below average credit ratings which are mainly due to their higher average risk of evasion in loan repayment. The financial institutions often charge higher interest on subprime mortgages in order to compensate for the risk taken. Thus, as the banks began clear out more loans to home owners, the housing prices rose. The easy accessibility of credit in U.S. in addition to large foreign inflows led to the boom in construction and increased consumer spending that was mostly financed by debt. The falling prices of houses resulted in more homes less worthy than mortgaged loans which provided a financial incentive to financial institution to take possession of mortgaged property when the mortgagor failed redeem loans leading to financial crisis in banking sector (Brunnermeier, pp.78-81). ...
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