Why did banks and other financial institutions start taking on more risk during the house price...

Why did banks and other financial institutions start taking on more risk during the house price bubble?

Expert Solution

The housing bubble burst took place in 2008 when banks gave out loans to individuals without checking their credit history or taking appropriate mortgage in return, and people started defaulting on their loans.

These banks and financial institutions started taking more risks by giving out loans to people without checking their credit history, in order to make more money (in the form of interest), compete with each other in making maximum loans and relying on the Fed to bail them out in case of emergency.

This careless attitude of banks in giving out poor quality loans in order to make more money led to more defaults and thus housing bubble burst.

Rahul Sunny answered 2 years ago

How did many investors, analysts banks, and other institutions miss Enron's deceptive practices on their financial...

How did many investors, analysts banks, and other institutions miss Enron's deceptive practices on their financial statement?

why are depository institutions are more prone to runs than other financial intermediaries.

Why financial institutions are managing risk ?

Explain why depository institutions are more prone to “runs” than other financial intermediaries.

Why are financial institutions and markets' governance, regulations, and risk, so important?

5. Mortgage-Backed Securities and Risk Taking by Financial Institutions: Do you think that institutional investors that...

5. Mortgage-Backed Securities and Risk Taking by Financial Institutions: Do you think that institutional investors that purchased mortgage backed securities containing subprime mortgages were following reasonable investment guidelines? Address this issue for various types of financial institutions such as pension funds, commercial banks, insurance companies, and mutual funds (your answer might differ with the type of institutional investor). If Financial Institution are taking on too much risk, how should regulations be changed to limit such excessive risk taking?

When, how, and why did financial institutions begin and evolve in the United States? A. Are...

When, how, and why did financial institutions begin and evolve in the United States? A. Are financial institutions an independent clause, a complement, or simply just a consequence of economic growth? B.What are the problems of adverse selection and moral hazard in the market for health insurance?

There are various types of financial institutions and intermediaries such as commercial banks, investment banks, mutual...

There are various types of financial institutions and intermediaries such as commercial banks, investment banks, mutual funds, hedge funds, pension funds, insurance companies, etc. Why are there so many different financial intermediaries other than commercial banks? How does an investor’s risk attitude and/or wealth play a role in his/her selection of a financial institution or intermediary? If you were an investor seeking moderate return for your investment, how would you select a financial institution or intermediary? Choose one and explain...

Why failure of (commercial) banks and many other financial intermediaries (such as investment banks) can lead...

Why failure of (commercial) banks and many other financial intermediaries (such as investment banks) can lead to a recession, such as the one observed after 2008 financial crisis? (Hint: your answer should relate to role of financial intermediaries and asymmetric information).

Discuss the creation of the National Banks during the Civil War. Why did it develop into...

Discuss the creation of the National Banks during the Civil War. Why did it develop into a dual banking system? Discuss the structural weaknesses of banking in the United States during the late 19th and early 20th centuries after the National Banking Act was implemented and how attempts to reform the system led to the creation of the Federal Reserve in 1913.

Question