Presented By, Bulbul Sharma

Presentation Scheme

Meaning of Subprime Crisis Subprime Lending versus Prime Lending Road to Subprime Crisis Effects of Subprime Crisis Conclusion

What is Subprime Crisis? “Borrower fails to repay his/her Subprime loans”

Prime Lending Versus Subprime Lending

Issued to household with highly rated credit histories.

Issued to households with low incomes and assets, and with troubled credit histories. High Interest rate Called “B-paper” credits

Low interest rate

Called "A-paper" credits.

Road to Subprime Crisis…
National Partners in Home Ownership,1994 Fall in Interest rate Rise in house price More Subprime lending

Write off as Bed Debts

Fails to pay

Reduce in demand and Fall in House’s price

Increase in Interest Rate

Effects of Subprime Crisis

On Banking Industry
 In

2008 the loss is estimated like 280 billion US Dollars. For example: UBS AG Bank has suffered $37.7 billion, Citibank – $39.1 billion.

Contd..

Real Estate

At the end of 2007 home prices had fallen approximately 8% from their peak in 2006. Construction of houses dropped in the same period

Contd…

Risk Preferences
 Structured

assets of all ratings grades are being shunned in favor of simpler cash securities. Example: Bear, Stearns collapse

 For

Conclusion “Currently
new regulations is the best way to deal with the system, preventing banks to have risky operations will decrease the chance of having crisis in the future. FED should also extend its powers.”

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