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US Banking A discussion on US banking noting that it is more volatile and complex than ever today.     :

US Banking A discussion on US banking noting that it is more volatile and complex than ever today. PRESENTED BY:- PRIYA SIROHA(16) AMIT JHA(39) INDU BHUSHAN(52) VANDANA(26)

The funding maze of the securitized marketfunds. Focus on parallel banking system (Q2 07 data) :

The funding maze of the securitized marketfunds . Focus on parallel banking system (Q2 07 data)

Securitization market: smaller and different :

Securitization market: smaller and different The economics of leveraged, short dated funding of ABS and CDOs are dead. Leveraged securitization are economical without reliance on short-dated funding. The natural candidates for these are corporate bonds and loans and not ABS. The main buyers of CDOs will be those with long-dated funding such as endowments, pension funds and insurance companies. CDOs based on consumer loans, including non-mortgage loans, are unlikely to return. The economics of tranching requires low correlation in defaults within the loan pool.

Characterization of the crisis:

Characterization of the crisis Relaxation of lending standards in the mortgage market Highly-leveraged securitized market Short-dated funding used by securitized market

But these effects are minor compare to the financial system’s strengths :

But these effects are minor compare to the financial system’s strengths Strong bank capital base to compensate for risks; Excess supply of financial savings to ensure funding of investment needs; Liquidity provision ensured by market-makers ; Securitization involves government vehicles, such as GSEs and not private CDOs , as in the US; and mortgage lending to low and middle-income families ensure sufficient collateral and high recovery rates. There is no sub-prime market

SUB-PRIME CRISIS:

SUB-PRIME CRISIS

Likely effects on America :

Likely effects on America Increase cost of dollar-lending in the domestic market. Tighter lending standards in US to curb domestic lending. Corporate bonds to turn illiquid. Lack of appetitive for securitized lending to hit holders

Likely changes in regulation :

Likely changes in regulation Central banks as lenders of last resort New bank regulation

Central banks as lenders of last resort :

Central banks as lenders of last resort Emergency actions: The rate cuts, which could be reversed Structural changes: The type of collateral accepted, the maturity of the loans extended, and the type of borrowers to have access to the central banks. Central banks will come to the realization that the core of the bank run on securitized assets was the fact that they have little access to this market Will central banks target asset prices? Central banks will stay with the Greenspan doctrine that it is impossible to identify asset bubbles while they emerge—asset prices are not part of their legal mandate.

New regulations :

New regulations Lending standards: Will result in a tightening in bank lending standards in the retail mortgage sector in America Securitized loans: These will likely involve lenders retain a more significant interest in individual loans. Liquidity creation: Central banks extending its lender of last resort obligations will overcome problems of liquidity creation. But in addition assurance of liquidity provision will be assessed in greater detail. US Glass Steagall act : Central banks extending its lender of last resort will result in regulatory differences between US commercial and investment banks disappear. Marking to market (MTM) and disclosure. It typically reinforces the amplitude of the credit cycle, but will remain as tool to ensure disclosure and transparency.

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