IMF: Sub-Prime To Test Financial Markets

by Stewart Douglas

Story link: IMF: Sub-Prime To Test Financial Markets

Markets will probably require a significant period of time to adjust after the collapse of the sub-prime lending sector in the US, according to the International Monetary Fund’s global stability report released today.

The report highlighted that the growing unrest in worldwide financial markets will serve to try the current market structure for credit distribution and risk management, and will drive home the potential pitfalls of the lax lending discipline seen in recent years.

The news has resulted in a market-wide adjustment of credit risk pricing, off the back of ongoing problems from the US sub-prime fallout which have led to lender liquidity problems and core funding disruption.

The sub-prime lending sector, responsible for administering finance to high risk borrowers collapsed in the US, along with a complex reinsurance and inter-bank capitalisation network spanning the global finance market.

As a result, businesses and consumers everywhere have faced a credit crunch environment, which according to the IMF report will be responsible for hindering business growth over the coming sessions and creating an all-round prudent commercial climate.

Insurers and risk managers across the world will have reconsidered credit investments in recent months, with tightening lending practices across the board leading to a lack of available lending stock for business and consumer borrowers.

After the embarrassing and altogether economically disruptive impact of the sub-prime fallout on both lenders and insurance companies, it remains to be seen how resilient the insurance market will be to backing high risk banking strategies in future years, particularly with the level of over-exposure allowed in the sub-prime crisis.

Whereas lending represents an increased risk at present, it is hoped the Federal Reserve interest rate cuts of last week will help ease the pressures on risky sub-prime borrowers to instill more confidence within the financial markets.