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PARIS: An explanation of the key terms and concepts
in the highly technical US subprime housing crisis that has rattled
world stock markets and threatens economic growth in the United
States and beyond.
Subprime mortgage: A subprime
mortgage is a home loan a bank gives to a customer who is considered
“subprime,” which means he or she has a poor credit history or
no credit history at all. Banks charge a higher interest rate to
these customers to compensate for the risk of potential losses if
the borrowers are unable to keep up with repayments. The current
crisis is due to rising defaults on subprime loans because borrowers
have been hit by higher interest rates and falling property prices.
Invesment funds: These funds are
an investment vehicle in which assets are pooled and jointly managed
for investors by fund managers. The managers invest in a range of
financial instruments. They are a form of collective investment
intended to yield better profits than the level of a traditional
bank deposit. Investors participate by putting money into the funds.
Funds which invested part of their money in the subprime mortgage
sector are being hardest hit by the current crisis.
Financial markets: Markets on
which financial instruments are traded. The four main financial
markets are the foreign exchange market, the fixed interest or bond
market, the share or equity (stock) market and the derivatives
market.
Central banks: A central bank is
a body responsible for monetary policy in its country. In the
European Union, it is responsible for monetary policy in a group of
member countries. In the United States it is called the Federal
Reserve. Its main responsibility is to maintain the stability of the
currency and money supply, including interest rates. The central
bank lends money to financial institutions and is sometimes called
“the banker’s bank.” The central bank can inject money into
the economy to try to avoid a financial crisis. Both the European
Central Bank and the Federal Reserve have done it this week due to
the US subprime mortgage crisis.
 --AFP
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