In order to minimize costs, banks seek securitized facilities which take the loans off the balance sheet and as was the case in the US, they could offer more loans at subprime rates with little worry of default as the economy was doing well.
The prevailing political environment in the lead up to the financial crisis was one of de-regulation with a focus to economic expansion. This section of the paper evaluates incentives for banks to use subprime lending and securitization as tools for maximizing shareholders value. Risk Management in Banking.
IMF, Banks also used securitization and subprime lending as ways of raising rates of return on assets and lowering capital expenditure. There are many financial experts says that the improving economic and financial position might reason rigid improvement of the monetary scheme to be unable to find some grip the crowded policy.
Introduction Shah stated that the global financial crisis which has been brewing for a while has really started to show its effects in the middle of and into Shiller and Bessis highlight that flight to quality and fire sales for funds and leveraged firms triggered the crisis further as leveraged firms tried to reduce debt and match asset values to the Loan to Value ratios.
This gave bank employees the incentive to offer risky loans and mortgages The credit mechanisms were designed to be bullet-proof, almost risk-free. It was basically a massive bubble, and was bound to burst at some point.
At this point, it was clear that the US subprime mortgage market was headed for disaster and the world markets later watched in shock as the problems spread across the globe and resulted in the worst financial catastrophe of modern times.
The effects on the global financial system were far- reaching. The persistent removal of restrictions and oversights on the domestic financial system of the US, combined with the decisions of individual firms, other governments and foreign financial organisations, culminated in the singe largest depreciation of assets and currency valuations in history, surpassing even the Great Depression in its extents.