Banking 500 2008

2007 was characterised by a global financial crisis that had its inception with the sub-prime mortgage crisis in the United States. Defaults and foreclosure activity in the U.S. housing market grew significantly in the second semester, leading to serious instability in the global financial market. 

Mortgage lenders were the first to be hit by the crisis. Through securitization many of these lenders had passed related default risk on mortgage payments to third party investors through MBS – mortgage backed securities – and these investors incurred significant losses. Furthermore, collaterised debt obligations – CDOs (an asset-backed security and structured credit product) and structured investment vehicles – SIVs (another type of structured credit product) also held significant amounts of MBS, leading to decreases in value in these products.

As the crisis widened and the risk of default impacted financial markets globally, banks either reduced the number of loans to other banks or increased interest rates charged for lending money. Liquidity became a worldwide issue, leading central banks to take action and support member banks in lending funds to credible borrowers.