In: Finance
The 2008 sub-prime mortgage crisis in the United States could have been mitigated by applying prudent credit management. Explain in detail how proper credit risk and assessment could have diverted the course of unfortunate events.
Rating Agencies sometimes ignored the fundamentals and
manipulated the rating of certain debt ridden companies by giving
higher rating. These companies then got access to cheaper source of
credit which were sourced from banks and other financial
institution. Indirectly lot of public and private fund is at
risk.Greed is another factor.Banks and financial institution in
order to expand their business and achieve targets lend credit to
subprime ( group of borrowers with poor credit worthiness). This
happened in the subprime crisis or housing bubble where public
money through banks were loaned out to subprime customers.
These Could have been prevented by following :
1. If banks had less exposure to subprime borrowers
and If banks had kept securities or mortgage in lieu of
loans then the losses would have been less.
2. The reserve requirement at the time of crisis was very liberal
and this allowed banks to loan huge amount to subprime borrowers.
If the reserve requirements were higher it would have been
prevented.
3. Credit rating agencies should have performed an honest
assessment which would have shown which companies have poor credit
rating and this would have prevented banks from providing loans to
them.
Please Discuss in case of Doubt
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