The subprime meltdown continues to boost defaults and foreclosures, now well beyond the real estate market. In the banking system today’s pressures come from two sources. The first one is a continuous uncertainty about the value of underlying assets, underscored by a deterioration in economic growth.
The other is associated with the nature of financial intermediation: banks have adopted a position of increased risk aversion and demand high premiums to offer funds. As a result there is an erosion on both credit quality and availability which, at the end of the day, translates into a further worsening of the real economy.