ERM Frameworks and Responses to risk [13]

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Bullet points include: Trigger was a localised problem of higher than anticipated default rates in US sub-prime mortgages, see e.g. Kemp (2009) or BoE (2008) Following lax lending, benign economic conditions, ‘search for yield’ etc. Mortgages had been parcelled up and sold to banks (and others) round world through RMBS and CDO structures Confidence in valuations collapsed in Summer 2007. Ratings agencies which had acted as experts in this market lost credibility Banks started to distrust their counterparties, because they knew that others couldn’t easily value their books, so anyone might be insolvent Any bank with a business model requiring liquidity was in trouble

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