The Study Of Financial Fragility And Its Performance In The Sub-prime Crisis

Financial fragility is also called financial instability is the intrinsic properties of financial institutions which always experience cyclical fluctuations, these fluctuations cause the economy to decline. This article introduces some theories of financial fragility from the perspective of credit market, information asymmetric, financial Liberalization and financial system.Every financial crisis in history has exposed the accumulation of financial fragility in the financial system, so as subprime crisis. The financial fragility exposed in this crisis was analyzed as belowFirstly, the margins of safety which are always used to audit creditors were eroded.After "911" American economy had experienced an ascending cycle. In this cycle commercial banks and other lenders had gradually declined their margins of safety. The example for this decline was more and more applicants who could not receive mortgage loan before became the customer of commercial banks. These applicants have many questions such as short of down payment, lack of income proof and so on.Such applicants were vulnerable to downwards shocks. If the price of housing declines or the interest rate rises, these creditor will easily involved in financial crisisSecondly, the development of financial derivatives was out of control. Logically, the default of subprime mortgage can't result such destructive financial crisis. The financial innovations base on subprime mortgage play an important role in this process. Initially RMBS(Residential Mortgage-Backed Security, RMBS) were created based on mortgages, then CDO(Col-lateral Debt Obligation) based on RMBS,CDO2 based on CDO, RMBSâ†'CDOâ†'CDO2â†'CDO3...... In theory this can create infinitely. In this process turnover and risk were amplified rapidly. These derivatives were extremely sensitive to the negative shock to their basis assets. Finally, the regulation system didn't fit the financial development. The crisis exposed obvious lack of financial monitor system. The financial regulation department disappeared in monitoring financial innovations and ignored the monitory of rating agencies.The Subprime Crisis's shock to Chinese financial system is invisible, but there also are many lessons we can learn from this crisis. In the end of the article the author based on the lessons of this crisis gives some recommendation to the Chinese financial system.