What was the impact of economic crisis on US banks?
Answers
Answer:
The banking crisis effected almost all sector of the economy especially production sectors. Their effects on the other areas, for example; rising unemployment or cut down the working hours, Consumer spending has fallen, reflecting heightened uncertainty, tight credit conditions and lower financial wealth.
Answer:
We all know very well that mortgage market has experienced a real boom in the United States during the last few years due to extremely attractive mortgage loan terms. But this boom end with start of severe financial crises. There was lot of hidden risks and mistakes in the mortgage market boom. Banking sector are vulnerable to many forms of risk which have triggered occasional systemic crises. These include liquidity risk, credit risk, and interest rate risk. Banking crises have developed many times throughout history, when one or more risks have materialized for a Banking Sector as a whole. The main reason on which all agreed upon it, was high leverage ratio combined with increased maturity mismatch that led to a weak situation. To be more particular, leverage can cause a risk-shifting problem resulting in excessive risk-taking. Hence lenders, who look forward to excessive risk taking, and cut back their funding. The lack of new funding is however no problem if existing funds are secured with long-term debt contracts, since no new funds need to be raised in the interim. New funds are needed only when debt matures earlier than the assets pay off, i.e., if there is a maturity mismatch.
According to Dr Alexander Dibelius, head of the Investment Banking Division at Goldman Sachs “The roots of the problem are to be found in the systematic failure to measure and price risk properly over the years that affected virtually all riskier asset classes in the financial markets.”
1.2 Impact of the Current Financial Crisis on Banking Sector
According to IMF Report April 2009, the impact of Financial Crisis on Banking Sector is very deep and since the start of the crisis, market capitalization of global banks has fallen by more than half from $3.6 trillion to $1.6 trillion, while the value of preferred shares and subordinated debt has also fallen sharply, underscoring concerns about the size and quality of capital cushions (See following Figure).
Figure 1: U.S. and European Bank and Insurance Company Market Capitalization, Writedowns, and Capital Infusions (In billions of U.S. dollars, and of period)
Figure 1.28. U.S. and European Bank and Insurance Company Market Capitalization. Writedowns, and Capital Infusions
illustration not visible in this excerpt
In the following subsections provides an overview of distressed banks in different regions:
1.2.1 U.S.
After the initial indication of Liquidity crisis in August, 2007, the U.S. banking sector got a red alert signals in which banks one by one fell down (including closed, M & A, nationalized etc.).
The Northern Rock was the first bank who seeks and received a liquidity support facility from the Bank of England afterwards in January 2008 and become nationalized. The bank was UK based but left the effects to other financial institutions, specially the collapse of Bear Stearns.We all know very well that mortgage market has experienced a real boom in the United States during the last few years due to extremely attractive mortgage loan terms. But this boom end with start of severe financial crises. There was lot of hidden risks and mistakes in the mortgage market boom. Banking sector are vulnerable to many forms of risk which have triggered occasional systemic crises. These include liquidity risk, credit risk, and interest rate risk. Banking crises have developed many times throughout history, when one or more risks have materialized for a Banking Sector as a whole. The main reason on which all agreed upon it, was high leverage ratio combined with increased maturity mismatch that led to a weak situation. To be more particular, leverage can cause a risk-shifting problem resulting in excessive risk-taking. Hence lenders, who look forward to excessive risk taking, and cut back their funding. The lack of new funding is however no problem if existing funds are secured with long-term debt contracts, since no new funds need to be raised in the interim. New funds are needed only when debt matures earlier than the assets pay off, i.e., if there is a maturity mismatch.
According to Dr Alexander Dibelius, head of the Investment Banking Division at Goldman Sachs “The roots of the problem are to be found in the systematic failure to measure and price risk properly over the years that affected virtually all riskier asset classes in the financial markets.”[1]