Abstract

http://ssrn.com/abstract=1383473
 
 

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The Role of Banks in the Subprime Financial Crisis


Michele U. Fratianni


Indiana University - Kelley School of Business - Department of Business Economics & Public Policy; Universita' Politecnica delle Marche

Francesco Marchionne


Nottingham Business School - Department of Economics; Università Politecnica delle Marche - Money and Finance Research group (Mo.Fi.R.)

April 10, 2009

Review of Economic Conditions in Italy, 2009/1

Abstract:     
The ultimate point of origin of the great financial crisis of 2007-2009 can be traced back to an extremely indebted US economy. The collapse of the real estate market in 2006 was the close point of origin of the crisis. The failure rates of subprime mortgages were the first symptom of a credit boom tuned to bust and of a real estate shock. But large default rates on subprime mortgages cannot account for the severity of the crisis. Rather, low-quality mortgages acted as an accelerant to the fire that spread through the entire financial system. The latter had become fragile as a result of several factors that are unique to this crisis: the transfer of assets from the balance sheets of banks to the markets, the creation of complex and opaque assets, the failure of ratings agencies to properly assess the risk of such assets, and the application of fair value accounting. To these novel factors, one must add the now standard failure of regulators and supervisors in spotting and correcting the emerging weaknesses. Accounting data fail to reveal the full extent of the financial maelstrom. Ironically, according to these data, US banks appear to be still adequately capitalized. Yet, bank undercapitalization is the biggest stumbling block to a resolution of the financial crisis.

Number of Pages in PDF File: 37

Keywords: accounting, banks, credit, crisis, fair values, risk aversion, undercapitalization

JEL Classification: G01, G21, N20

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Date posted: April 16, 2009 ; Last revised: May 12, 2014

Suggested Citation

Fratianni, Michele U. and Marchionne, Francesco, The Role of Banks in the Subprime Financial Crisis (April 10, 2009). Review of Economic Conditions in Italy, 2009/1 . Available at SSRN: http://ssrn.com/abstract=1383473 or http://dx.doi.org/10.2139/ssrn.1383473

Contact Information

Michele Fratianni (Contact Author)
Indiana University - Kelley School of Business - Department of Business Economics & Public Policy ( email )
Bloomington, IN 47405
United States
812-855-3360 (Phone)
812-855-3354 (Fax)

Universita' Politecnica delle Marche ( email )
Piazzale Martelli, 8
60121 Ancona
Italy
39-071-2207120 (Phone)
Francesco Marchionne
Nottingham Business School - Department of Economics ( email )
Burton Street
NG1 4BU Nottingham
United Kingdom
01158488500 (Phone)
Università Politecnica delle Marche - Money and Finance Research group (Mo.Fi.R.) ( email )
Piazzale Martelli, 8
Ancona, 60100
Italy
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