Credit Crunch Essay

1048 words - 5 pages

Loans from banks are something quite common in the modern world. Credits are requested both by individuals and large corporations for all kinds of purposes. However, this common practice is seen as one of the main reasons for the financial crisis which occurred in 2008 (Taylor, 2009). The explanation offered by the experts is that the problem lied in the fact that number of credits was rising, global savings were decreasing, while the long-term interested rates remained low (Taylor, 2009, pp. 4). The recession brought immense changes in terms of loaning policies and the decrease of 37% was recorded when it comes to the loans to large corporations and institutions (Ivashina and Scharfstein, ...view middle of the document...

565). This change is attributed to the belief that covered bonds can lead to increase in liquidity (Schwarcz, 2010, pp. 565). Also, covered bonds are seen as a solution for replacing some of the previous financial moves used before the financial crisis elapsed.
Covered bonds – effective solution or tool for increasing banks’ margins?

When it comes to the covered bonds, it is reasonable to ask whether utilizing them is useful for the global economy, or it just creates an opportunity for the banks to increase margins. It is certainly undeniable that covered bonds are beneficial for the banks, the number of them which incorporated covered bonds into their operating strategy. According to Bank of Sweden, covered bonds ensure that the lending still continues as they are the main source of funding for this activity (Swedbank, 2014). European banks largely make use of the covered bonds and today majority of them use them as the main source of funding (Bernanke, 2009). It is reasonable to doubt whether this is an option which is beneficial to the banks’ customers, national and global economy, or only to the banks themselves. The doubt which arises is supported by long history of exploitative nature of operations undertaken by the banks, as well as with the official reports which do confirm that covered bonds increase bank’s margins (Deloitte, 2010). However, before making the decision about the utilization of covered bonds and opportunities for increasing personal capital, it should be taken into account how covered bonds can contribute to the global well-being and whether they are a suitable solution for the existing troubles caused by the global economic crisis.
One of the quoted benefits from the usage of covered bonds is that, during the economic crisis, in countries (mostly European ones) effects of the economic recession was reduced because covered bonds were issued. Additionally, these countries did not experience complete freezing of the housing financing market as it happened in the United States (Kreitzer, 2012, pp. 18) These results were obtained from the research in which all possible interfering variables such as...

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