Impact of the credit crisis on investment banks

1829 words 8 pages
Cause of Problems for Financial Institutions during the Credit
Crisis: Select a financial institution that had serious financial problems as a result of the credit crisis. Determine the main underlying causes of the problems experienced by that financial institution. Explain how these problems might have been avoided.

Table of Contents
I- Credit crisis .................................................................................................... 2
II- Impact of the credit crisis on investment banks ................................. 2
1) Definition of Investment bank ................................................................... 2
2) Impact of the credit crisis on investment bank
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It is also the first major bank to collapse since the credit crisis began a year earlier. The following shows result from a SIFMA survey that asked respondents “What event had the most significant impact on the industry during 2008?”.

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FINANCIAL MARKETS & INSTITUTIONS

2) Reasons lead to bankruptcy
The reason why Lehman Brothers filed for bankruptcy the 15th of September was mainly because of major factors: sub-prime mortgages, leverage, credit default swaps.

 The sub-prime mortgages:
From 2004 to 2006, sub-prime mortgages accounted for about 21% of total the mortgage loans, up to 9% compared the period 1966-2004.
The development of the sub-prime mortgages related to the booming of US’s house market as a result of reduced interest rates, the lending standards was easier and the tend to prefer buying house of the American.
In this period, buying house in US was quite easy. The market is always affected by the law of supply and demand. Therefore, when people buy a house not because of housing demand which use it as an investment tool, then after a certain time to build more houses for sale, housing market will be surplus. Meanwhile, the banks of America because of profit from enjoying the

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FINANCIAL MARKETS & INSTITUTIONS

high-interest term which loaned even for people lacking a strong credit history or having other characteristics that are associated with high probabilities of default. When interest rates are

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