Subprime lending
Also called: Subprime crisis · Topic: Banking Regulation, NPAs and Financial Stability · NCERT: Beyond NCERT
Meaning
Subprime lending means giving loans to borrowers with weak credit histories, who are more likely to default. In the US in the 2000s, lenders gave many subprime home loans (mortgages). These loans were bundled into MBS/CDOs (securities backed by the mortgages) and sold to investors around the world. The lenders who made the loans kept none of the risk, so they had little reason to check borrowers carefully.
Example
When US house prices fell, subprime borrowers defaulted, and the MBS/CDOs lost much of their value. AIG had sold insurance on these securities through credit default swaps (CDS) and could not meet the claims. Lehman Brothers collapsed on 15 September 2008, and the 2008 global financial crisis followed. The crisis led to Basel III, the FSB (2009) and the G-SIB rules.
Don't confuse with
- Prime lending rate (PLR): this was an Indian bank's benchmark lending rate from 1994. "Subprime" describes the borrower's weak credit quality, not an interest rate.
Related concepts
- Letter of undertaking
- Know Your Customer
- Legal Entity Identifier
- Ponzi scheme
- Chit fund
- Systemic risk
- Stress test