Banking Crisis Essay Example | Topics and Well Written Essays - 5000 words

Banking Crisis - Essay ExampleThe crisis is thus perceived to overhear occurred as the result of exposure to Market Risks due to such risk transfer weapons (Banks normally atomic number 18 never exposed to market risks because they reply on internal systems in managing the faiths) that caused many loopholes in the trust Risk Management in management of lending to Sub-Prime customers. These customers are individuals or companies who do not extradite clean credit history or regular source of income. The Banks & Financial Institutions preferred to lend loans to Sub-Prime customers to return the benefits of higher interest rates at a perceived calculated exposure of the investment enceinte to higher risks. To facilitate this in a secured and manageable manner, the banks & financial institutions used the mechanism of Securitization that essentially is the mechanism of distributing the risk of the lending to the investors outside the Banking system through a process. The process of Securitization resulted in the boom of conviction Derivative Market and was used extensively in the US Sub-Prime Mortgage Market by change magnitude the number of risky products but still reduce the liabilities on their balance sheets (thus shielding the same from remote auditors). The money was shown to be flowing through so called conduits from investors to the borrowers through the SPV and SIV system. As described by experts the capital drawbacks that occurred in this process are poor military ranks of assets acquired against the credit instruments thus resulting in uncertain asset valuation & high credit risk exposure that couldnt detect the imperfections in the Credit Markets. Even the external order agencies got trapped in this mirage and couldnt predict the Sub-Prime crisis because the Securitization Process was extremely complex and the dependency was upon scattered and unreliable info outside the core banking system. Moreover, the Banks risk assessment didnt demonst rate due diligence in screening the sub-prime borrowers and communicate the investors about the associated risks in the so called securitized products. The overall system expanded uncontrollably and the competition became very rigorous resulting in loans getting sanctioned at the flash of light and there was no time for comme il faut risk management. The actual risks ware completely covered under hyped data and analytics about the new credit instruments which, frankly no one understood correctly - not even the external auditors and the statutory & cheek