Money and banking Assignment Example | Topics and Well Written Essays - 500 words

Money and banking - Assignment Example Conversely, introduction of money market mutual funds constrained deposit to banks since they paid higher money market values. Finally, the introduction of ATMs in the banking sector reduced the cost of transactions, which the banks used to benefit from due to the paper work required (DeYoung). Hence, the consequence of this shift was a reduction in banks fundamental sources of funds. Experts cite adjustable-rate mortgages (ARMs) as a dubious practice that exacerbated the financial crisis. In this case, ARMs enticed borrowers with low credit to enable them borrow against the value of homes. This way, families were able to own homes that were beyond their reach. Consequently, there was an inflation of a new bubble in the housing sector as prices were indicative of families’ inability to pay (Mackaman). Subprime mortgages, like ARMs, contributed to underpaid-workers owning homes that they could not afford to pay. In effect, this led to creditors risk managing the default payments through shadowy techniques that involved bundling, selling, and repackaging debt. With the number of defaulters rising, what followed was a number of foreclosures that were in contrast with the value of debt bundling from banks and saving institutions. In effect, these institutions resulted to liquidity and solvency status that lead to the crisis (Mackman). Strictly put, banks that follow proper lending procedures will ensure that the borrowers are credit worthy and they will not become defaulters, which can make a bank lose money. However, a bank with high nonperforming loans runs the risk of a low capital base to do business and they can run into trouble with financial regulators. In addition, such publicity might result to substantial withdraws from depositors (a run on the bank). 6- Explain the Basel requirements and how banks got around the