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Week 11 Confederation Life and RBC

Because of the higher interest rates paid prot

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Unformatted text preview: Banks contributed to this frenzy by not properly assessing risks associated with some of these mortgages, not doing their due diligence on the inflated housing prices or the ability of the borrower to pay back the mortgage should the rates change. •  A proper regulatory regime could have prevented such risky behaviour. Most decision makers did not recognize the risk that was being placed on financial markets because of this lack of oversight. U.S. Sub- prime Mortgage Crisis •  This was in part based on the assump)on that home prices would not fall drama)cally. •  But prices did fall. Soon people found themselves owing to the bank more money than their house was worth. •  It made more financial sense for them to walk away from their investment than to con)nue to pay. •  This lea the banks and other lenders holding a large number of undervalued assets, which accounted for large financial losses to the banks. •  Basically the bank’s had bet that housing prices would con)nue to rise and that people would con)nue to pay their mortgages. They were wrong. U.S. Sub- prime Mortgage Crisis •  The U.S. Financial Crisis Inquiry Commission reviewed the crisis and in early 2011 determined that: –  The crisis was avoidable. –  Failure in oversight by the Federal Reserve contributed to the crisis. –  Breakdowns in corporate governance and taking on too much risk for short term financial gain occurred. –  Excessive borrowing by consumers and excessive spending furthered the downward spiral. –  Government failed to see the signs and act accordingly earlier. –  A breakdown in accountability and ethics contributed. Key differences in the American and Canadian Banking systems •  In Canada the federal government had the power to regulate and charter banks. • ...
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