Written By Basilio Chen

VN:F [1.9.16_1159]
Rating: 0.0/5 (0 votes cast)

The U.S. Banking System Today
As of October 2012, the status of the banking system in the USA is the result of events from 5 years ago.
In 2007, the U.S. banking system (and the European banking system also), experienced a major “shortage” in lending, in part due to the lack of banks balance sheets stemming from the sub-prime lending problems. Banks were considered high risk and their risk premiums increased dramatically due to the lack of safety margins and uncertainties of which banks would fail (or would require a government bailout, which meant privatization resulting in the equivalent as investors losing their investment). All this banking crisis resulting from many banks having issued large of quantities of loans of inferior qualities to high risk debtors – marginal and low income borrowers.
The phenomena that built up the crisis culminating in the bursting starting in September 2007, was an unordinary increase in real estate prices in the USA which kept rising higher to bubble proportions. Loans made by banks in the form of real estate mortgages have been made based on ever higher valuations of the underlying real estate collateral. In an attempt to slow the inflationary bubble, the Federal Reserve raised interest rates, making it more difficult to borrow additional funds and to service adjustable rate mortgages. Consequently, more homeowners/real estate speculators have defaulted on their loans and the values of the underlying collaterals have dropped substantially in many locations. Bankruptcies went on the rise, eliminating job and a negative spiral started on more loan defaults and more bankruptcies, more jobs lost, more loan defaults. Then Fed action to pump back the moribund economy and attempt to prevent further defaults by lowering and maintaining interest rates low to historical proportions.
China Banking and Economics Today
China felt the effect of the US financial crisis of 2007-2009 as consumer demand slowed reducing imports from China. China responded with monetary stimulus of large proportion and lowered interest rates in addition allowing for individual to purchase multiple real estate units when before it was limited to the population. Real estate prices have increased to great proportions and the central bank in China reduced liquidity, increased interest rates and restricted loans in order to cool the inflationary pressures in real estate and other natural resource areas.
While bankruptcies and loss of jobs also occurred, the difference in China compared to the USA is that a large percentage of the population is less dependent on loans and there is much cushion in savings at all levels, personal and government. There still exists close to 60 trillion of personal investable assets and government federal and government owned enterprises also have vast cash and asset in reserves to cushion a crisis.