Question

Define what is mean by non-performing loans. Discuss the relevance of NPLs in the 2008 global financial crisis in the context of bank failures, securitization, and credit default swaps.

Answer 1

Non performance loans are those in which borrower fails to repay back interest and principal after predetermined period of time.

This was major cause of 2008 financial crisis where borrower failed to repay back laons and houses which were collateral or mortgaged were sold heavily which led to crash in prices and thus banks failed to recover prerequisite amount leading to bankruptcy.

Credit default swaps were those products in which buyer pays premiums for anticipation that subrpime mortgage loans shall fail. Banks who are issuers who then had failed ended up paying insurance of large billions of dollars on credit default swaps.

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