Credit score calculations and bank lending in the global financial crisis

It is now 5 years since the onset of the global financial crisis, and it is interesting to reflect on how credit risk analysis processes have ultimately affected the global economy. The subprime mortgage crisis in the US was the beginning of a chain event that had a domino effect, when the financial viability of some of the largest financial institutions was reduced, leading to a stock market crash and, ultimately, a national recession, rising unemployment, declining unemployment and indeed a global recession as the economies of the rest of the world were affected by events in the United States.

The catalyst for what eventually turned into a catastrophe was a set of sophisticated financial instruments that essentially allowed banks to sell the risk of default to other players in the economy. At a time when financial institutions focused more on the credit rating of consumers claiming their products, buyers of these instruments, called pledged debt, could comfortably profit from the transaction because of the credit risk associated with their purchase of the right to these loans. were low enough that they could profit from the deal despite lending to occasional defaulters.

However, this has led to behavior in banks where they have virtually ignored the credit history of consumers who have applied for loans. Over time, there has been no correction in the risk of non-repayment of the loan accounted for in these securitization transactions, and both banks and securitization companies have been left without loans that could be expected to repay. This has clearly undermined the financial viability of banks.

Worse, banks that did not engage in such securitization practices and were considered more financially sound often lent money to tier two banks and thus faced credit rating problems starting with the “snowball” worst financial crisis in vivid memory. .

While this may seem inconspicuous when someone applies for a loan or credit card, it actually involves an analysis process conducted by banks to try to make sure that credit risk does not further undermine the viability of the company. After the global financial crisis, lending criteria were significantly limited, so that only borrowers with a high level of loan reliability can access the best market rates in this area.