Financial community is getting more and more anxious about the current crisis. In fact another prestigious bank, Merryl Lynch, has announced very bad results. This quarter, they lost $5 billion because of subprime loans. Many other banks have similar problems: Northern Rock, BNP Paribas, Morgan Stanley, Barclays, UBS…
Subprime loans are a very dangerous tool. They were provided most of time to “bad” customers, whose credit rating was under medium average. In fact these borrowers who did not qualify for loans from mainstream lenders. This phenomenon was widespread in the US, where about six million people who have no money have borrowed about 100% of the value of a house, right at the top of housing market which has since fallen sharply. These are the subprime borrowers. With subprime loans, customers pay only the loan's interests for a long while and then have to pay suddenly all the borrowed money. This is very risky... Furthermore these loans depended on the interest rates. As central banks raised their interest rates, it became harder and harder for customers to pay back their loans. A slowdown in the US housing market coupled with rising US interest rates have also hit the subprime system.
A lot of people have been unable to pay their debts. Thus banks lost huge amounts because of this risky tool. All the financial community is suffering from this incident. Banks are afraid and refuse to lend money each other. Thus Central Banks are now obliged to lend huge amounts to banks.
Subprime loans are a very dangerous tool. They were provided most of time to “bad” customers, whose credit rating was under medium average. In fact these borrowers who did not qualify for loans from mainstream lenders. This phenomenon was widespread in the US, where about six million people who have no money have borrowed about 100% of the value of a house, right at the top of housing market which has since fallen sharply. These are the subprime borrowers. With subprime loans, customers pay only the loan's interests for a long while and then have to pay suddenly all the borrowed money. This is very risky... Furthermore these loans depended on the interest rates. As central banks raised their interest rates, it became harder and harder for customers to pay back their loans. A slowdown in the US housing market coupled with rising US interest rates have also hit the subprime system.
A lot of people have been unable to pay their debts. Thus banks lost huge amounts because of this risky tool. All the financial community is suffering from this incident. Banks are afraid and refuse to lend money each other. Thus Central Banks are now obliged to lend huge amounts to banks.
No comments:
Post a Comment