During the recent global financial crisis and recession, banks throughout the world
have experienced an increase in non-performing loans i.e. bad debt. Most publicity
has been given to the plight of housing markets. However, many loans to small
business and households have also turned out to be non-performing. Discuss the
following as possible explanations:
(a) Banks have become less risk averse
(b) Banks have made loans on the basis of incomplete information
(c) Central banks have made available lender of last resort facilities

Can I get any advice on what to discuss?

Question

During the recent global financial crisis and recession, banks throughout the world 
have experienced an increase in non-performing loans i.e. bad debt. Most publicity 
has been given to the plight of housing markets. However, many loans to small 
business and households have also turned out to be non-performing. Discuss the 
following as possible explanations: 
(a) Banks have become less risk averse  
(b) Banks have made loans on the basis of incomplete information 
(c) Central banks have made available lender of last resort facilities

Can I get any advice on what to discuss?

anonymous · Answer

The banks risk aversion is mainly due to minimized possible grounds for gains. What I mean is that think of loans for banks being an asset, however the asset must be viewed as a callable bond because of it's nature. This feature of a callable bond limits the profitability upside so if the risk of loans not being paid back goes up backs step back.