Sub-Prime Losses Could Exceed ‘Pessimistic’ Forecasts, According To Bernanke
September 20, 2007
Losses arising from over exposure to the sub-prime sector will rise in excess of even “the most pessimistic” forecasts, according to a statement made today by the Chairman of the Federal Reserve.
Chairman Ben Bernanke made the announcement to a US finance committee meeting which suggested that the extent of the sub-prime crisis was further beyond previous analyst expectations, sending trading on global markets down significantly as a result.
The sub-prime sector has been the source of endless worry and heartache for lenders in the US and across the world. With banks becoming over-exposed to the risky sub-prime sector, many have felt the heat as foreclosures and repossessions from rising interest rates have tied up liquidity and prevented ordinary lending practices.
The announcement came just two days after Ben Bernanke announced a significant cut in interest rates in the US, taking the basic rate of lending down to 4.75% from 5.25% in a bid to bring more stability back to global financial markets.
The Federal Reserve also announced their intention to invest more funds directly into the finance sector to ease the credit worries plaguing the markets, a move which has won plaudits from industry analysts and experts across the world.
Recent quarters have seen an increase in foreclosures of around 50% on normal rates with high interest rates pushing knife-edge sub-prime mortgages beyond the realms of affordability, leaving many banks with significant liquidity shortages to continuing their lending operations.
Bernanke announced that the full extent of foreclosures and repossessions could be much more significant than analysts had previously suggested, which could still have an even more serious fallout for the wider US economy as lenders begin to feel the full effect of a higher cost of borrowing and lack of available liquidity.
The Federal Reserve’s movements in recent days have been well received by lenders and markets, as having the potential to help ease current market jitters over the medium term.