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Finance Study Essay

849 words - 4 pages

A bank acts as an intermediary between savers and borrowers and manages the whole process by paying equity and cash to savers and cash to net borrowers and in this process the bank earns its profit.
A bank is a financial institution and a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly or through capital markets. A bank connects customers that have capital deficits to customers with capital surpluses. So bank is a very important part and identity of this whole transaction phenomenon. The TED Spread is the difference between the interest rates on interbank loans and on short-term U.S. government debt ("T-bills"). TED is an ...view middle of the document...

Since the start of 2008, the year the financial crisis erupted, 445 banks have failed.
The traditional mortgage model involved a bank initiating a loan to the borrower/homeowner and retaining the credit risk. Securitization is a process whereby loans or other income generating assets are bundled to create bonds which can be sold to investors. With the advent of securitization, through mortgage-backed securities and collateralized debt obligations (CDO) the traditional model has given way in which banks essentially sell the mortgages and distribute credit risk to investors. A more direct connection between securitization and the subprime crisis relates to a fundamental fault in the way that underwriters, rating agencies and investors modelled the correlation of risks among loans in securitization pools. Credit rating agencies are now held accountable for giving investment-grade ratings to MBSs based on risky subprime mortgage loans. These high ratings enabled these MBSs to be sold to investors and financing the housing boom. These ratings were believed justified because of risk reducing practices, such as credit default insurance and equity investors willing to bear the first losses. Critics allege that the rating agencies suffered from conflicts of interest, as they were paid by investment banks and other firms that organize and sell structured securities to investors.
The SEC, U.S. Securities and Exchange Commission is a federal agency which holds responsibility for implementing the federal securities laws and regulating the securities industry, the nation's stock and options exchanges in the United States. The SEC was...

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