When it comes to the crunch: What are the drivers of the US banking crisis? |
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| Authors: | Eliot Heilpern Colin Haslam Tord Andersson |
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| Affiliation: | 1. University of Pittsburgh, Pittsburgh, PA, United States;2. Stanford University, Palo Alto, CA, United States;3. Cleveland Clinic Foundation, Cleveland, OH, United States;4. Innsbruck Medical University, Innsbruck, Austria;5. Universidade Federal de Ciencias da Saude de Porto Alegre (UFCSPA), Porto Alegre, Brazil;6. Emory University, Atlanta, GA, United States;7. University of Colorado, Denver, CO, United States;8. University of Toronto, Toronto, ON, Canada;1. UFZ – Helmholtz Centre for Environmental Research, Department of Economics, Permoserstraße 15, D-04318 Leipzig, Germany;2. University of Heidelberg, Philosophisches Seminar, Schulgasse 6, D-69117 Heidelberg, Germany |
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| Abstract: | This article considers how permissive regulatory conditions helped change the size and scope of the US mortgage market. Asset backed securitization facilitated an expansion of the US mortgage market and modified the structure of the value chain within which financial assets, risk and liquidity were managed. New sophisticated mortgage products, indulgent lending practices, loose credit assessment and flimsy documentation increased the probability of mortgage default in an economic downturn. US banks were not in a position to absorb mark-to-market losses on mortgage assets and goodwill impairment resulting from a credit crunch because they operate with narrow profit margins and a limited equity cushion in the balance sheet. This article questions the viability and sustainability of this banking business model. |
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