Post 7: Responsibilities of a Bank
Nov 28th, 2010 by Andy Mao
One of the major causes for the 2008 financial crisis is from poor managements in banks. From our last class, we discussed about the roles of a bank, and I decided to further analysis it to help connect these concepts with our modern society.
In general there are two types of banks, Investments banks that sell security or Depository banks that typically handle mortgages.
The problem started when the United States eliminated the “Financial Services Moderation Act.” By trying to help the general population afford money they decided to lower the mortgage rate to allow more people to start their mortgages.
These types of mortgages are typically “Prime Mortgages.”However, most people stopped paying their mortgage because they could not financially afford it and started to back out. Since banks normally put most of their cash in investments, it was hard to give cash back to the investors on the Depository side. Eventually, as the bank runs out of money, people will tend to do a “bank-run” which caused many banks to bankrupt during the great financial crisis.
This crisis affected everyone world-wide including investors, banks, currencies, businesses. The reason behind this crisis is because people bended the rules of the game but they didn’t get the job done properly.
Glossary
Financial Services Moderation Act – 1999 when the government allowed banks to hold “Investments” and “Depository” activities
Prime Mortgages – the property value is much higher than the loan value
Eg: house mortgage
Bank-Run– when everyone tries to take money out of the bank at once