Why Did the American Banking System Fail
1. Introduction
To understand the development and the impact of the financial crisis, the following paragraph gives a general overview about the timeline of the financial crisis and the series of reactions which caused, at the end, the failure of the American banking system and led to a worldwide economic downturn with the result of the global economic crisis. The topic of this paper is the failure of the American banking system, but as the banking systems of the whole world are interdependent, the whole situation and the whole crisis has to be investigated.
2. Timeline of the economic downturn
As a result of the declining U.S. house prices in 2006 and 2007, refinancing became more difficult and as adjustable-rate mortgages began to reset at higher rates, mortgage delinquencies soared. Securities that were connected with subprime mortgages decreased heavily in their value. As a consequence, the capital of many banks declined and the U.S. government had to help out enterprises by tightening credit around the world.
In Fall 2007, it became visible that the financial market could not solve the crisis by itself and that the problems and the crisis also influenced banks on the whole globe. The interbank market froze completely because of the fear of the unknown risks of other banks. Northern Rock, a British bank, had to approach the Bank of England for emergency funding due to a liquidity problem. (New York Times, 2007)
In this period, central banks and governments around the world came together to cope with the current crisis and prevent further financial crisis.
The subprime crisis 's unique issues called for both, conventional and unconventional methods, which were employed by governments worldwide. One method was that central banks of several countries worked together to provide liquidity support to financial institutions. The reasons therefore was to reactive the interbank market.
The U.S. Federal Reserve Bank started slashing the discount rate as well as
To understand the development and the impact of the financial crisis, the following paragraph gives a general overview about the timeline of the financial crisis and the series of reactions which caused, at the end, the failure of the American banking system and led to a worldwide economic downturn with the result of the global economic crisis. The topic of this paper is the failure of the American banking system, but as the banking systems of the whole world are interdependent, the whole situation and the whole crisis has to be investigated.
2. Timeline of the economic downturn
As a result of the declining U.S. house prices in 2006 and 2007, refinancing became more difficult and as adjustable-rate mortgages began to reset at higher rates, mortgage delinquencies soared. Securities that were connected with subprime mortgages decreased heavily in their value. As a consequence, the capital of many banks declined and the U.S. government had to help out enterprises by tightening credit around the world.
In Fall 2007, it became visible that the financial market could not solve the crisis by itself and that the problems and the crisis also influenced banks on the whole globe. The interbank market froze completely because of the fear of the unknown risks of other banks. Northern Rock, a British bank, had to approach the Bank of England for emergency funding due to a liquidity problem. (New York Times, 2007)
In this period, central banks and governments around the world came together to cope with the current crisis and prevent further financial crisis.
The subprime crisis 's unique issues called for both, conventional and unconventional methods, which were employed by governments worldwide. One method was that central banks of several countries worked together to provide liquidity support to financial institutions. The reasons therefore was to reactive the interbank market.
The U.S. Federal Reserve Bank started slashing the discount rate as well as