After the 1982 debt crisis, the U.S. savings and loan (S&L) crisis in the United States in the late 1980s, and the Asian financial crisis of 1997, the subprime mortgage crisis is the fourth major banking crisis since World War II, and by far the biggest. According to the International Monetary Fund, the total loss in terms of balance sheet write-offs will be nearly $1 trillion worldwide, of which the lion's share probably will be borne by U.S. financial institutions. Given that the combined equity capital stock of all U.S. financial institutions is roughly $1.2 trillion, this is a breathtaking sum.
Why do banking crises happen? Are bank managers ignorant?
Why do they underwrite risks that drive their banks to the brink of bankruptcy? The answer lies in a combination of a bad accounting system and various moral-hazard effects that were not contained by existing regulatory systems.
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