Subprime assets lost value rapidly between 2007 and 2009. This lowered the value
ID: 2645915 • Letter: S
Question
Subprime assets lost value rapidly between 2007 and 2009. This lowered the value of banks that had exposure to these assets and financial institutions that had exposure to banks that were exposed to subprime risk. Since the assets were hard to value they were not acceptable as collateral. This made banks illiquid and this scared away the suppliers of bank capital. A liquidity crisis turned into a credit crisis for many financial institutions such as WAMU, Wachovia, Lehman and others.
Is it true or false?
Please explain why is true or false. Thank you.
Explanation / Answer
True.
Reason : Banks get finance from Financial institutions and Federal Reserve but they need to repay those finance as per the commitments.During 2007-2009 , in pursuit of increasing business volume , banks financed morgages to customers having poor credit rating or poor credentilal for repayment. When the mortgages turned sticy( that is when the customers did not repay as per the schedule of repayment ) , the banks got into poor liquidity ( means less of cash in hand) and they failed in their commitment to repay their financiers. Because of this failure to honor commitments financiers also stopped financing the banks.So a liquidity crisis turned into a credit crisis for many financial institutions such as WAMU, Wachovia, Lehman and others.