When it comes to the crunch: What are the drivers of the US banking crisis?

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.

Keywords:

• US credit crisis
• Mortgage securitization
• Financial value chain
• Risk and liquidity

Acknowledgements

We would like to thanks Dr. Nick Tsitsianis and Dr. Edward Lee of CRiFA for their contributions to this article and observations from Professor Geoff Hodgeson.

Additional information

Notes on contributors

Eliot Heilpern

Eliot Heilpern holds the post of Vice President for International Payment and Trade Services at a major global financial institution in the City of London. Previous roles were with the IBOS Banking Cash Management Group, 11years with a UK Clearing Bank, and 4 years with a private investment bank.

Colin Haslam

Colin Haslam is Director of the Centre for Research in Finance and Accounting (CRiFA) at the University of Hertfordshire.

Tord Andersson

Tord Andersson is a visiting lecturer in finance at the University of Hertfordshire and Business Adviser in Sweden. Having previously worked as financial analyst for 14 years, at Skandia/DnB Asset Management, UBS Warburg and Handelsbanken, and 8 years as product manager at Ericsson.