US subprime and financial crisis - To what extent can you safeguard financial system risks?

Research Paper (postgraduate) from the year 2008 in the subject Business economics - Banking, Stock Exchanges, Insurance, Accounting, grade: 1,7, University of applied sciences, Neuss, course: General Economics, language: English, abstract: The subprime mortgage financial crisis is an ongoing financial crisis which was caused by the sharp rise in the US subprime mortgage market that began in the United States in fall 2006 and became to a global financial crisis in July 2007. Rising interest rates increased the monthly payments on newly-popular adjustable rate mortgages and property values suffered declines from the demise of the US housing bubble, leaving home owners unable to meet financial commitments and lenders without a means on their losses. Many observers believe this has resulted in a severe credit crunch, threatening the solvency of a number of financial institutions and marginal banks. Declines in stock markets worldwide, several worthless hedge funds, central bank interventions, contractions of retail profits and bankruptcy of several mortgage lenders are some of the results we saw in this subprime crisis. The crisis was caused by several reasons, e. g. the developments on the US housing market, the insolvency of many American loan takers, the absence of appropriate diligence of the financial institutions and within the created financial assets, the delayed intervention of the regulating authorities and the activities of the rating agencies while evaluating the credit derivatives and securitizations.The theoretical optimum for an investment is a high return without any risk and without loosing liquidity. The real situation shows that an investor has to match these three points optimal for his own investment strategy. A higher return is always linked to a higher risk and increased uncertainty. And if the money is expended the investor looses a part of his liquidity. Credit derivatives and securitizations are used to separate the risk of credits from the original credit relation. These instruments can be handled on markets for credit risk transfer and have a great impact on credit business. The market for credit risk transfer can be separated into the market for credit derivatives, on which single credit risks or baskets of few similar risks are dealt, and the market for securitizations, which means that a lot of different risks are bundled together to a separate estate and dealt afterwards. The aim of these instruments is to make credit risks dealable and therefore a standardisation with appropriate transparency is necessary. [...]