Effect Of US Subprime Mortgage Crisis On The Banking Sector

By: EconomyWatch   Date: 30 June 2010

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Abstract:

Effect of US subprime mortgage crisis on the banking sector cannot be ignored. Many undulations have occurred in the money market with subsequent ripples being created in the entire system. The aftermath has been revealed in the article below.

Effect of US subprime mortgage crisis on the banking sector has been immense. This is evident from the fact that banks as well as stock markets were affected in every nook and corner of the world. The European Central Bank or the ECB came to the rescue of many. The amount injected by the ECB to rescue the other banking institutions was €95 billion. The rate of interest was 4%. This was the first rescue operation, the second and the third followed with a cash assistance of €61 billion as well as €47.67 billion respectively. The approach taken by the authorities of other Central Banks were also varied. Central Bank of Japan's contributions to the financial markets comprised injection of 600 billion yen or €3.6 billion.

The price of stocks fell in Frankfurt, Tokyo and New York. In fact, the financial assistance, which the ECB had shelled out exceeded the amount it shelled out after terrorist attacks on the World Trade Center on 11th September.

  • Effect of US subprime mortgage crisis on the banking sector did not spare IKB Deutsche Industriebank in Germany (Europe). The bank had to be bailed out by a payment of USD11.1 billion. It has investments in the United States mortgage market.
  • A bank in France, known by the name BNP Paribas halted all withdrawals. This step was taken by the bank as the actual value of the assets were not being ascertained.
  • Another bank, which was about to declare bankruptcy was WestLB.
  • Deutsche Postbank as a measure to combat the effects of US subprime mortgage crisis on the banking sector redirected or re routed euros worth hundred million of the bank's funds.

    BaFin, a federal agency in Germany is responsible for the regulation of the industry dealing with financial services.

    Other effects of the crisis include rise in rates of interest. As a result of this, lending business got stalled. The signals started from the money market. In the money markets there is liquidity and the banks carry out several transactions to keep the system functioning. If the functioning of the money markets gets distorted, the whole system gets upset.


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