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Reflections on the financial crisis
The Causes and Enlightenment of American Financial Crisis

At present, the Wall Street financial crisis triggered by the subprime mortgage problem in the United States has become the focus of attention all over the world. The financial crisis on Wall Street not only hit the fragile economy of the United States, but also caused the collapse of the American stock market, which also brought great harm to the economies of other countries. So why is there a serious financial crisis on Wall Street? What has this financial crisis brought us? This paper intends to discuss this.

First, the causes of the US financial crisis

The financial crisis caused by the subprime mortgage problem in the United States has a complex background. I think the main reasons are as follows:

1. The ultra-loose environment that stimulates the economy has buried hidden dangers.

On April 2, 2007, New Century Financial Company, the second largest subprime lending institution in the United States, declared bankruptcy, marking the outbreak of the subprime mortgage crisis in the United States. The source of the subprime mortgage crisis is its loose monetary policy in the early stage. After the bursting of the new economic bubble and the "9. 1 1" incident, in order to avoid economic recession and stimulate economic development, the US government took measures to reduce bank interest rates and encourage investment and consumption. From 2000 to 2004, the Federal Reserve cut interest rates continuously, and the federal funds rate dropped from 6.5% to 1%. There is no guarantee and down payment for loans to buy a house, house prices have been rising all the way, and the real estate market has become increasingly active, which has also contributed to the economic prosperity in the late Greenspan era. It is a good thing to provide subprime loans, so that low-income people can afford to own their own houses. For ordinary families, low interest rates and soaring housing prices have created a bright future, and investment in housing has become a huge temptation, so a large number of residents have entered the mortgage market. By the end of 2006, subprime loans involved 5 million American families, and the known subprime loans reached 1. 1 trillion to 1.2 trillion dollars.

Taking real estate as collateral is the key to risk.

American subprime consumers use real estate as collateral, and the price of real estate determines the value of collateral. If house prices keep rising and collateral prices keep increasing, it will not affect consumers' credibility and repayment ability. Once the house price falls and the collateral depreciates, the money that the same house can borrow from the bank decreases. If the loan interest rate increases, the floating interest rate will also rise with the subprime mortgage, and the money to be repaid will increase greatly. Subprime lenders are low-income people, and they have to give up their property rights because they haven't got loans yet. Lending institutions cannot recover loans, but can only recover the lender's property. Recyclable property can't be sold, but it keeps depreciating and shrinking, so there is a loss, and even the funds can't flow out. House prices are shrinking and interest rates are rising, which is the killer of subprime loans.

In 2005-2006, in order to prevent market consumption from overheating, the Federal Reserve raised interest rates by 17 times, and the interest rate increased from 1% to 5.25%, and the market interest rate entered an upward cycle. Because the transmission of interest rates to the market often lags behind, American subprime loans rose in 2006. However, the effect of raising interest rates gradually appeared and the real estate bubble began to burst.

3. Securitization of sub-prime loan assets aggravated the spread of the crisis.

The vast majority of mortgage institutions in the United States are regional savings banks and savings and loan associations, and local commercial banks also participate in mortgage loans. The financial strength of these institutions is not very strong, and a large amount of funds are put on housing mortgage loans, which has caused serious pressure on their capital turnover. Some financial institutions with "financial innovation" tools package these credit assets and issue negotiable bonds as guarantees. Give a fairly attractive fixed income and sell it. Many banks and financial institutions, such as asset management companies, hedge funds, insurance companies and pension funds, invest in these bonds. Mortgage enterprises have a steady stream of financing channels, creating a rapid growth of new subprime loans; Investment institutions get higher returns.

Various financial derivatives make the cash flow of investment institutions more reasonably utilized, the benefits are decomposed and shared, and the risks are shared. However, everything has two sides. Financial innovation system will not only bring risk dispersion mechanism, but also produce risk amplification effect. Innovations such as subprime mortgage have enabled those residents in the United States who can't meet the standards of housing mortgage loans to buy houses, and at the same time, they have become subordinated debts through asset securitization, which have loaded high risks with high returns and spread all over the world. In this sense, all countries that have bought the US subprime mortgage debt will be forced to "pay the bill" for the US subprime mortgage crisis. When the real estate bubble bursts and the subprime lenders can't repay their loans, not only the mortgage companies are in a loss dilemma and can't pay a fixed return to the financial institutions that buy subprime loans, but also those investors who buy subprime derivatives lose high returns because of the falling bond market price, which also leads to liquidity shortage and loss. Since the third quarter of 2007, financial institutions began to report huge losses, reflecting the sharp decline in the value of mortgage loans and other assets.

The securitization process of subprime loan assets is actually a process of combination and credit enhancement, and it is also a process of superposition of various assets and various credit subjects. After asset securitization, the information disclosure and related risk information of this asset securitization portfolio may become more opaque, resulting in few people in the market being able to clearly understand the risks, let alone make real-time risk pricing. Due to the lack of understanding of the real value and risk of assets, investors rely largely on the reports of rating companies to make decisions. The credit rating of credit rating agencies is playing an increasingly important role in the financial market, and credit rating is also an indispensable link in the process of asset securitization. Whether the credit rating is objective and fair, whether financial instruments are truly understood, and whether there are conflicts of interest and moral hazard. These factors will have a great impact on the global financial market. Subprime bonds were originally developed from some low-quality assets, and "financial innovation" made these low-quality assets get high-grade labels through the rating of credit rating companies, which proved to be seriously overvalued afterwards.

Due to information asymmetry and unknown risk loss, once there are significant risks and losses in subprime mortgage loans, the credit enhancement and credit superposition based on these securities will "collapse instantly" like castles in the desert, which will inevitably cause investors' panic in investment confidence, and the instinct of avoiding risks will accelerate investors' selling, aggravate the turmoil in financial markets, and financial disasters will be inevitable. In the risk transmission chain of subprime mortgage, securitization and credit derivatives, the subprime mortgage crisis may not happen at all without the participation of credit rating companies.

Second, the enlightenment of the American financial crisis

The financial crisis triggered by the subprime mortgage problem in the United States has taught us a profound lesson, which China should take as a warning.

1. Understand and prevent the market risks of mortgage loans.

Mortgage with real estate as collateral seems to be the safest asset, but the value of real estate is constantly changing with the market. When the market is improving, rising real estate prices will increase the market value of collateral, reduce the risk of mortgage credit, and induce banks to continuously expand the scale of mortgage credit. But the price of real estate can't rise endlessly, because no enterprise or individual can ignore the cost of its production and survival. The market reversed and house prices went down, making it difficult for banks to dispose of collateral. Even if the collateral is auctioned, the proceeds will not be enough to repay the loan. This will not only bring a lot of bad debts to lending banks, but also endanger the safety of the banking system and the healthy development of the whole economy. Therefore, banks need to make a rational choice between risk and return, and improve their ability to identify and resist market risks.

2. Understanding and preventing credit risks

The reason for the high default rate of subprime loans is that lending institutions do not adhere to the "three C" principle, that is, risk assessment of borrowers' basic characteristics, repayment ability and collateral. From the experience of foreign countries, the borrower's basic characteristics (age, education level, health status, occupation), the purpose of buying a house (self-occupation or investment), marital and family status, repayment ability (mortgage percentage, monthly income ratio of housing payment, total debt-income ratio of households, asset-liability ratio, etc.). ) and collateral (real estate value, new houses, second-hand houses, service period, lots, single-family houses and multi-floors).

In the East Asian crisis, Hong Kong's asset prices have shrunk dramatically, and many buyers are facing negative asset pressure, but the bank default rate has not risen sharply. It is because the banking industry in Hong Kong has strong anti-risk ability and strict eligibility criteria for individual housing loans. Most borrowers buy houses for their own use, their jobs are stable, their income and cash flow remain unchanged, and the use value of the property remains unchanged, and they will still repay the loan on schedule.

When expanding personal loan business, China's commercial banks should avoid non-economic and irrational colors such as "achievement goal", reduce administrative intervention in the allocation of credit funds, strengthen the review of borrowers' repayment ability, implement different risk pricing and lending standards for borrowers with different credit risk levels, including their own capital, down payment ratio, interest rate and term, etc., and promote the bank's transformation from service risk pricing to customer risk pricing, from extensive operation to refinement and personalization, so as to improve its ability to resist risks.

3. Establish and improve the information disclosure mechanism and loan specifications.

Regulatory authorities should supervise banks and insurance institutions engaged in housing credit, fully disclose product information to borrowers in the marketing of various loans and insurance products, so that borrowers have full right to know and choose, and reduce the damage of information asymmetry to borrowers' rights and interests. Promote standardized contracts, loan review procedures and lending standards, and standardize bank lending behavior and post-loan services.

4. Establish a real estate financial early warning and monitoring system to improve the ability to resist risks.

As financial risks are ubiquitous in economic life, it is an objective existence that is independent of people's will. The responsibility of the supervision department is to improve the ability of risk identification, predict, prevent, avoid and resolve risks, and improve the controllability of risks. Therefore, it is urgent to establish a real estate financial early warning and monitoring system, which will play a positive role in promoting the security of the banking system, the real estate market and the sustained and healthy development of the entire national economy.

Government departments should be warned from the crisis.

It is the government's responsibility to let people live and work in peace and contentment, but "everyone enjoys proper housing" does not mean that everyone has to buy a house. Letting low-income people who cannot afford to enter the housing market will not only be counterproductive, but also have many negative effects. Especially in the case that China's mortgage guarantee, mortgage insurance and other related financial infrastructure are not perfect, banks have invisibly exposed many policy risks. Therefore, an optimized housing market structure should be the unity of new housing and stock housing, housing for sale and rental, commercial housing and public housing provided by the government. The government should increase the supply of affordable housing and change the "only selling without renting" of affordable housing into "both renting and selling"; And through credit, tax and land policies, guide real estate enterprises to increase the supply of low-priced ordinary commercial housing, and give priority to ordinary commercial housing in the approval of construction permits.

6. China should establish and improve the housing mortgage insurance and guarantee system.

China should establish and improve the insurance and guarantee system of housing mortgage loan and improve the risk prevention and sharing mechanism of housing credit. The introduction of commercial insurance and policy guarantee mechanism is conducive to promoting the standardization of mortgage marketing and contracts and restraining the impulse of commercial banks to lend blindly; Reasonable insurance risk pricing mechanism is helpful for commercial banks to avoid credit risk, moral risk and periodic fluctuation risk of real estate market.

For reference only, please learn by yourself.

I hope it helps you.