credit crunch and banks' margin
Questions
1. Does offering covered bonds hold the answer to credit rationing (credit crunch) in a financial crisis or does it just offer banks the opportunity to increase their margin? Discuss critically. (25%)
In 2008, due to the global financial crisis took place in America, which made a bad influence all over the world in term of the financial market, banks decided to improve lending standards by providing higher interest rate than the market interest rate conditions for loans, which leads to decline in credit growth. By this way, credit funds are difficult to meet the reasonable needs of social reproduction.
This phenomenon is credit crunch (also known as a credit squeeze or credit crisis), Credit Crunch also known commonly as liquidity rationing, which means a reduction in the general availability of loans (or credit) or a sudden tightening of the conditions required to obtain a loan from the banks. Therefore it is independent of interest rate movements. However the disadvantage of this is to change the relationship between credit and interest rates so that credit becomes less available at a given interest rate level or there ceases to be a clear relationship between credit availability and interest rates. The reason why these events of a liquidity rationing often happen is the result of reckless lending management, which leads to bad debt for institutions. Consequently, when the investors cannot reimburse their loan payments, banks are forced to take sudden action and tighten the availability of loans or credit. For example, the Financial Crisis is a prime example of a credit crunch that resulted in a near collapse of the global financial markets.
Covered bonds are debt securities backed by cash flows from mortgages or public sector loans. Compared with asset-backed securities created in securitization, the main difference is that covered bond assets remain on the issuer’s consolidated balance sheet. One important enhancement of covered bonds is
1. Does offering covered bonds hold the answer to credit rationing (credit crunch) in a financial crisis or does it just offer banks the opportunity to increase their margin? Discuss critically. (25%)
In 2008, due to the global financial crisis took place in America, which made a bad influence all over the world in term of the financial market, banks decided to improve lending standards by providing higher interest rate than the market interest rate conditions for loans, which leads to decline in credit growth. By this way, credit funds are difficult to meet the reasonable needs of social reproduction.
This phenomenon is credit crunch (also known as a credit squeeze or credit crisis), Credit Crunch also known commonly as liquidity rationing, which means a reduction in the general availability of loans (or credit) or a sudden tightening of the conditions required to obtain a loan from the banks. Therefore it is independent of interest rate movements. However the disadvantage of this is to change the relationship between credit and interest rates so that credit becomes less available at a given interest rate level or there ceases to be a clear relationship between credit availability and interest rates. The reason why these events of a liquidity rationing often happen is the result of reckless lending management, which leads to bad debt for institutions. Consequently, when the investors cannot reimburse their loan payments, banks are forced to take sudden action and tighten the availability of loans or credit. For example, the Financial Crisis is a prime example of a credit crunch that resulted in a near collapse of the global financial markets.
Covered bonds are debt securities backed by cash flows from mortgages or public sector loans. Compared with asset-backed securities created in securitization, the main difference is that covered bond assets remain on the issuer’s consolidated balance sheet. One important enhancement of covered bonds is