The financial world is currently being hit with the "reality check" from years of reckless risk taking, according to the European Commission (EC).
EC internal market and services commissioner Charlie McCreevy believes years of high liquidity levels coupled with low money market interest rates created a “favourable breeding ground” for irresponsible risks.
“This ‘plethora’ of liquidity led some market participants to forget some basic banking, lending and underwriting principles,” McCreevy says.
“In particular the most basic principle of all: that the only way to prudently lend money is on the basis of a realistic assessment of the capacity of the borrower to repay.”
McCreevy says expectations of a short-lived credit crunch have now given way to the realisation that more financial troubles lay ahead.
“It will take time before all of the effects – and in particular the full disclosure of exposures and losses – have worked their way through the system and stability has been restored,” he says.
“But the problems have not been limited to the financial markets. They have also spilled into the real economy.
“For the moment the EU economy seems to be quite resilient but a slow-down in European growth is inevitable given the inter-linkages with the US economy.”
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