The failure of two big banks in the United States of America - The Silicon Valley Bank and the Signature Bank, reminds me of the horrible days of 2007, the Subprime Crisis.
However, it is not the first or second instance of a situation like this. Since the year 2000, there are around 562 bank failures, however, the one that happened in the year 2008 was the most notable one which pushed the world towards Recession.
What is a Subprime Crisis?
Let us know about the crisis in the easiest terms.
The subprime mortgage crisis of 2007 was a financial crisis resulting from many defaulting subprime mortgages in the United States. The crisis surged the global financial system and led to the Great Recession from 2007 to 2009.
The subprime crisis had its roots in the housing market, which was experiencing a boom in the early 2000s. Lenders were offering loans to borrowers with poor credit histories, often at adjustable rates, and with little or no documentation of their ability to repay. These subprime loans were then bundled into complex financial instruments, such as collateralized debt obligations (CDOs), and sold to investors worldwide.
The crisis began to unfold in 2007, as housing prices declined, and many subprime borrowers could not make loan payments.
As a result, many subprime mortgages defaulted, and the value of the CDOs plummeted. This cascaded the financial system as banks and other institutions that had invested in these instruments began to suffer huge losses.
The crisis was aggravated because credit rating agencies such as Moody's and Standard & Poor's had rated many of these CDOs as safe investments. These ratings proved wildly optimistic, and many investors were left holding worthless investments.
The subprime crisis had far-reaching consequences, including widespread foreclosures, bankruptcies, and job losses. Ultimately, the US government was forced to bail out several large financial institutions, such as Bear Stearns and AIG, to prevent the crisis from spreading further.
In conclusion, the subprime mortgage crisis of 2008 was a complex event that had far-reaching consequences for the global financial system. While there is no one cause of the crisis, a combination of lax lending standards, complex financial instruments, and inadequate regulation played a role.