Banks

What caused the banking crisis in Ireland?

The investment banks see opportunity to make commissions by satisfying the demand for higher yield by the investor community

This search was the driving force behind the creation of the financial products which primarily caused the crisis

The demand for yield let the financial innovation and this took the form of securitised credit instruments e.g CDO’S

Securitisation is simply taking a pool of illiquid assets and through financial engineering transforming them into liquid security

Securitisation was lauded in finance circles as it was used to reduce the credit risk and pass this on to end investors. This also reduced the need for bank capital requirements- originate to distribute model

These helped regional institutions to diversify risk- this therefore would protect the whole financial system

Market participants did not appreciate or understand the associate risks

The Wall Street bankers connect the investors to home owners through collateral debt obligations

The banker borrow heavily using cheap credit then call the mortgage lender and buys thousands of mortgages off them- house prices always rise after all

The bank pools these mortgages into portfolio box

The banker then gets a steady flow of cash from each mortgage every month

Next the box of mortgages was financially engineered into a collateralised debt obligation by dividing the box into three tranches or slices so that a rating agency will rate them

If the mortgage payments default then the bottom tray may not be filled

The CDO tranche are then rated by rating agencies this is a requirement in order to sell CDOS to investors

The banks the sell the slices to investors with different rick profiles

Everyone is making money and all parties want more home owners there are no more prime mortgages

But risk is added to mortgage qualifications as house prices always rise what can go wrong

Sub-prime mortgages are now introduced to cdos

As long as...