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Financial Crisis

Financial Crisis - Insufficient capital(capital adequacy...

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Lax mortgage standards, particularly for subprime (0% down, teaser rates) Adjustable Rate Mortgages reset (higher interest rates) Asymmetric and incomplete information: Uncertainty who is exposed to subprime mortgages, how big the losses will be Financial crisis of 2007-2009 Regulatory environment Housing crisis Financial crisis Bear, Fannie, Freddie, Lehman, AIG, WaMu, Wachovia Recession All FIs Increase in counterparty risk Fall in lending (credit crunch) Inability to roll over debt Financial distress Fall in value and liquidity of MBS Inability to raise new equity Fall in value of equity (capital) (mark-to-market accounting) Fall in share prices
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Unformatted text preview: Insufficient capital (capital adequacy requirements) Asset sales (deleveraging) FIs owning MBS Fall in house prices Foreclosure: more houses for sale Refinancing not possible Fall in home equity Rational to walk away Rise in house prices (bubble) Expectation of future price rises Moral hazard Low cost of capital Loose monetary policy = low interest rates Implicit guarantees & too-big-to-fail Incentive structures Losses for owners of mortgage-backed securities (MBS) No restructuring due to coordi-nation problem Securitization Capital requirements Default on subprime mortgages...
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  • Spring '09
  • Subprime mortgage crisis, subprime mortgages, rates Implicit guarantees, MBS Asset sales, Incentive structures Capital

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