The contagion channels and the effects of current financial crisis

The current subprime mortgage financial crisis began with the bursting of the housing bubble in the US and high default rates on subprime mortgage loans extended by banks to borrowers with questionable credit and consequent loss of faith in securities backed by these loans. The contagious effect of the subprime crisis has hit financial institutions around the world as well, damaging the health of a significant number of financial institutions and reducing the ability of others to run their business properly. This paper critically discusses the causes and consequences of the financial crisis resulting from the collapse of the subprime mortgage market in the U.S. On the basis of this analysis, we will focus on the main channels that the risk transmitted to and affect the financial market. Finally, we examine the actions of a wide range of financial intermediaries including mortgage lending institutions, investment banks and credit rating agencies and regulatory authorities.