It has been 5 years since the beginning of the global financial crisis and it is interesting to reflect on how credit risk analysis processes finally impacted the world economy. The subprime mortgage crisis in the United States was the beginning of a chain of events that had a domino effect in which the financial viability of some of the largest financial institutions was degraded, leading to a collapse in the stock market, and eventually to a national recession with rising unemployment, reduced tax revenues, and indeed a global recession, as the economies of the rest of the world were affected by events in the United States. Joined.
The catalyst for what eventually became a catastrophe was a complex set of financial instruments that essentially allowed banks to sell credit default risk to other players in the economy. In the days when financial institutions placed more emphasis on the credit rating of consumers ordering their products, purchasers of these instruments, called collateralized debt obligations, could comfortably make a profit on the transaction because the associated credit risk with their purchase of the rights to these loans was low enough that they could benefit from the transaction despite lending to occasional defaulters.
However, this led to behavior in banks where they had little or no regard for the credit history of consumers applying for loans. Over time, the credit default risk included in these securitization transactions was not corrected, and both banks and securitization companies were left without loans that could be trusted for repayment. This obviously undermined the financial viability of the banks.
To make matters worse, banks that had not engaged in this securitization practice and were considered to be more financially sound often had slow money for second-tier banks and were therefore exposed to these credit rating problems at as they began to turn into one of the worst financial crises in living memory.
Although it may seem inconspicuous, when someone applies for a loan or a credit card, they are actually immersed in a process of analysis carried out by the banks to try to ensure that credit risk does not undermine the viability of the company at a later stage. In the time since the global financial crisis, lending criteria have been substantially tightened so that only borrowers with high levels of creditworthiness can access the best market rates in the industry.