The Sub-prime Mortgage Market Crisis and Its Effect on the UK Banking Sector

Abstract

In August 2007, a serious credit, liquidity and confidence crisis started in the CRT market and spread, at the global level, into the inter-bank market. The deterioration in the American mortgage market was, however, only one component of the crisis. The search for yield, stimulated by years of low interest rates and high liquidity, had promoted the developments of increasingly complex products, which in turn brought serious mis-pricing of risk in a number of financial assets. Increasing and unexpected correlations among different classes of assets and markets emerged. This was particularly remarkable for assets linked to mortgage credit: with the increase in interest rates and decreasing house values, it is inevitable for borrowers to face difficulties. This situation was particularly worrying in the US, where the sub-prime mortgage market is wide, but the turmoil spread rapidly in other markets and countries as well.