Subprime Loans and Crisis Management Part.1

In early summer, those fears were fueled by a potential overheating in China and more widely within the BRICs. But it is the first economic and financial power that the crisis began. The crisis is termed as "subprime loans" in the United States.

Indeed, the media outburst is over from negative expectations that cannot be definitely confirmed that over the medium term.

The loans are subprime mortgage loans to counterparties particularly risky, satirically nicknamed "NINJA" (No Income, No Job or Asset). These loans are secured by the good they have to acquire and pay high interest rates that can exceed 10%.

The difficulties faced by two million borrowers in the U.S. and the resulted crisis is the result of two factors:

1. shortcomings in terms of risk assessment borrowers
2. an extensive use of securitization

Origin of the crisis: a failure in terms of risk assessment borrowers

The montages were created based on two strong assumptions:

* Interest rates are permanently down for the duration of the funding that exceeds 25 years in most cases,
* The loan amount is based on a steady growth in the future value of the asset financed.

Funding in place thus follows a logical assessment of market risk (the value of the asset financed), not a logical assessment of credit risk (the risk assessment of default by the borrower) as it is common, especially with the introduction of regulatory reforms such as Basel II credit. Out the regulatory environment in the United States does not in this sense, since they are only 20 large banks operating internationally, which will comply with Basel II. Other credit institutions will be subject to a lighter frame (called Basel IA), whose implementation is planned for 2009 (2007 in Europe).