EssaysForStudent.com - Free Essays, Term Papers & Book Notes
Search

First, Slap Limits on Bank Leverage

By:   •  Essay  •  759 Words  •  April 27, 2011  •  799 Views

Page 1 of 4

First, Slap Limits on Bank Leverage

Bloomberg BusinessWeek

This article provides information on how to prevent another Financial Crisis within the banking system. Democrats and Republicans are currently debating over whether to house a new Consumer Protection agency as a part of government, under the Federal Reserve or to let it serve as an independent entity, watchdog group. This solution assumes that the banks were the absolute cause of the crisis by manipulating less than smart consumers. However, if the borrower is less than smart, then so is the lending institution. In conclusion the article, recommends that that a better solution is to put a limit on leverage, which in turn would put a better grasp on the bank's use of its debt (p. 26).

I agree with the article's premise that the reason for the economic downfall was that the Banks gave out too many subprime loans. I feel that the customer's best interest should have been at the forefront and not the banks'. According to the article, "Before the bust, champions of the new consumer agency, such as Representative Barney Frank (D-Mass), were consistent advocates of more loans to subprime borrowers" (Lowenstein, 2010). I believe the reason for the government's non denial of subprime lending was to increase home ownership and give every American the opportunity to live the "American Dream". In order to increase affordable housing to many of Americans, institutions developed Adjustable Rate Mortgages (ARM). The ARM initially gives the customer a low affordable payment with the intention of refinancing before the mortgage adjusts. However it was not expected that house values would began to decline and so many borrowers would not be able to refinance after their rates adjusted. Many of the financial institutions, such as Fannie Mae, for instance were trying to maximize their market share by expanding their subprime lending and make more housing affordable. This in turn, led to many loans with unverified income, leading to many foreclosures. According to an article in the Washington Post, Fannie Mae's CEO said, " Fannie Mae hoped to bring higher standards to the market, and he added that the loans helped the company in its struggle to meet goals the government had set for Fannie Mae's advancement of affordable housing" (Hilzenrath, 2008). Increasing home ownership has always been one of the goals of our government, while in this case, over the last few years, there was no regulation on how to increase said ownership and too many tax breaks for taking on subprime loans.

I agree with the article's statement about limiting the bank's leverage. Banks should lend only to qualified customers with sufficient income. The customer's long term stability should be taken into account, as well. Limiting leverage would possibly decrease foreclosure rates because the bank would only be able to take on a certain amount of debt. Banks should be encouraged to use their

Continue for 3 more pages »  •  Join now to read essay First, Slap Limits on Bank Leverage
Download as (for upgraded members)
txt
pdf