- This graph shows the default rates on US Loans.
- Source: Board of Governors of the Federal Reserve System
The green line shows the default rate on residential property. By September 2009, the default rate had increased to 9.8%. This compares to just 1.9% at the end of 2006.
The blue line shows corporate default rates.
Implications of Default Rates on US Loans
- The worst of the credit crunch was considered to be in 2008. Banks realised they had many bad debts they had to write off – e.g. in the Sub prime mortgage market. However, these statistics show that banks will continue to experience more defaults and bad debts.
- This will reduce the profitability of the banking system and therefore make banks more reluctant to lend.
- It shows the depth of the recession in the US. Despite very low interest rates and initiatives to help homeowners, default rates continue to rise. The most likely cause is the rise in unemployment.
- It will make it difficult for homeowners and firms to gain loans from banks. They will be worried about improving their balance sheets rather than extending their loans. This will dampen any recovery in the housing market. Depressed house prices will act as a depressing factor on consumer spending.
- This kind of loan default rates suggests the US economic recovery will be weak.