Abstract
This paper aims at giving an overview of the significant elements of the US sub- prime mortgage crisis. The effects of the US sub- prime mortgage crisis will also be discussed on the discovery of price and liquidity in the global market and on the funding Australian bank particularly. The reasons on why Australian banks are exposed to bad US mortgages should also be discussed and raise justifications on the highlights of how such crisis impacted the financial system of Australian banks.
Introduction
The initiation of a financial crisis from the US mortgages largely affected many financial systems in the world and it has aroused for some years until today. The effects of such financial crisis primarily affected the prospects for the global economy in a grave manner (Blackburn, 2008). And, it has impacted throughout the English speaking countries in the world. It has been viewed that a poor condition of lending tolerated by the frail regulation and was aggravated through the lax bankruptcy laws and made the US a big downturn as well as the probable OECD.
Measuring the probable deceleration relies on the scale of losses to the funding system and its effects on the capability of the banking system to lend. The losses that resulted from default on substandard quality US lending are doubtful but however, it is somehow clear that around $200 billion dollars of losses have been prevailed and assessed in the vital scale of the losses range from $400 billion. It is also said that those are made by the International Monetary Fund in 2008 at around $1000 billion.
Thus, establishing the background of the problem where in the financial crisis arises in the banking system of US generally affects other financial institutions such as the Australian banking. This is primarily the main concern of the problem which constitutes the significant areas that should be considered in order to comprehend with effects of the crisis on the Australian banking system. This is important to note to be able to empirically understand and set a conclusion for the price discovery and liquidity in the bond market globally.
Discussion
Initially, the sub- prime mortgage crisis is a continuous dilemma which apparently resulted to its retention up until this year and last year 2007. This is also described by the contracted liquidity in the global market and banking system. The downfall that happened in the US housing market, extensive individual and corporate debt levels and the lending and borrowing practices have fallen under the numerous adverse impacts on the world economy. The crisis has gone through different levels that exposed persistent flaws in the global financial system and regulatory structure (Blackburn, 2008).
The dilemma originally started from the repletion of the United States housing market and high evades rates on sub- prime and the modifiable rate mortgages. For years before 2006, the lending standards have been lessened and loan incentives have been ascended such as a long- term trend of expanding housing prices and simple initial terms. This basically motivated borrowers to suppose complicated mortgages believing that it will be quickly refinanced in a more constructive term (Les, 2008). Nevertheless, if the interest rates started to increase and housing prices began to turn down in an average manner during the last two years.
Thus, refinancing appeared to be more complicated. Defaults and foreclosure acts increased drastically as easy primary terms terminated; home prices are also unsuccessfully increased as what is expected. Foreclosures, in addition to, have ascended in the United States in late 2006 and set off a global financial crisis through the past two years. In 2007, almost 1.3 million properties of US housing were issued to foreclosure activity that was originally increased seventy nine percent from the previous year.
There are large banks and other financial institutions around the world that have reported losses of about $435 US billion dollars. Moreover, the capability of corporations to attain funds from the issuance of commercial paper was impacted as well. This particular area of the crisis is unswerving with a credit critical situation. Consequently, the liquidity accounts for the central banks worldwide to get involved through bailing out defaulting financial corporations to be able to motivate lending to deserving and accountable borrowers at the expense of tax payers (Reinhart and Rogoff, 2008).
There are risks to be considered in the larger economy which is developed by the financial market crisis and housing market turndown. Hence, they were treated as the most important factors in many decisions by the US Federal Reserve to be able to cut the interest and the economic stimulus package passed by Congress and signed by President George W. Bush on the second month of 2008. Moreover, responding to the progress of market interferences to financially guarantee out specific firms in an approximately $700 billion dollars suggestion was proposed to the US Congress last month of the year. The actions are illustrated in order to encourage economic growth and motivate buoyancy in the financial markets.
Mortgage fraud had been revealed through the borrowers from the US Department of the Treasury and misrepresentations of loan application data and mortgage fraud are other factors that added up to the crisis. Indeed, the department of treasury was apprehensive on activity report of mortgage fraud at that moment (Demyanyk, and Van Hemert, 2008).
In the mean time, many economists around the world are measuring the potentials for a bigger turn down. An Australian lender in fact declared last 16th of August that the company failed to refinance a short- term debt as buyers get off from the credit markets. They added that they also failed to sell AUDS 6.17 billion worth of an extendable commercial paper where in it served as the biggest source of the funding loans pf the company. Thus, it basically gone through with the failure of the US financial crisis and the Australian Stocks Exchange was impacted (Reinhart and Rogoff, 2008).
Conclusion
Generally, the fall down of the US financial and banking institutions largely affected many other banking systems in the world (DiMartino and Duca, 2007), and Australia in particular. It had been discussed that lending institutions somehow accounted for such failure and prices were widely affected as well as the liquidity of the bond global market. Major flaws were emphasized through the unsuccessful global market of countries worldwide including Australia which was directly impacted by the failure of the US financial system.
Thus, the effects of the said failure should then be realized over a review and an extensive financial accounting in order to stabilize what has been done. Australian banks relatively were exposed to certain instances because they are known to have a strong financial system which can go with the flow of the US.
References
Blackburn, R. (2008). The Subprime Mortgage Crisis, New Left Review #50.
Demyanyk, Y. & Van Hemert, O. (2008). “Understanding the Subprime Mortgage Crisis”, Working paper published at Social Science Research Network.
DiMartino, D. & Duca, J.V. (2007). The Rise and Fall of Subprime Mortgages, Federal Reserve Bank of Dallas “Economic Letter”. Vol. 2, No. 11.
Gold, G. & Feldman, P. (2007). “A House of Cards – from fantasy finance to global crash”. London, Lupus Books.
Les, C. (2008). “No help for 70% of subprime borrowers” Cable News Network.
Reinhart, C.M & Rogoff, K.S. (2008). Is the 2007 U.S. Sub-Prime Financial Crisis So Different? An International Historical Comparison, Harvard University.