What Is the Financial Sector Debt?
- The outstanding loan amount that consumers or business operators owe on property loans is part of the financial sector debt. Banks may sell mortgages numerous times to other lending companies to either make a profit or improve a firm's liquidity. Firms that underwrite mortgages maintain outstanding balances as liabilities. A mortgage liability is a debt, because the company has not recovered the funds it originally loaned or used to purchase the mortgage from a third party.
- When banks borrow from the federal government or from other financial institutions, the amount becomes a part of the financial sector debt. Banks borrow money to cover short-term liquidity needs, such as withdrawals against checking and savings accounts. Since banks use consumer deposits when loaning money, they count on receiving money from interest and principal payments on credit cards, unsecured loans and secured loans. This includes loans and credit issued to both the consumer and commercial sectors.
- Banks may sell securities to investors that other debt secures. For example, mortgage-backed securities are financed by consumer mortgage payments. Banks pay the investors who purchase the securities with the revenue they receive from mortgage repayments. Issuing securities backed by debt creates additional financial sector debt. If mortgage accounts become delinquent, the bank runs the risk of not being able to meet its payment obligations to investors.
- Private lending institutions may transfer debt to the federal government. The government usually intervenes to prevent a major financial crisis, such as a depression or a complete shutdown of the credit market. For example, banks that finance federal student loans may transfer ownership of the student loans to the government, allowing the banks to issue more profitable types of debt. Typical interest rates on credit card debt, for instance, are often much higher than those on student loans. Secured debt in the form of auto loans may also prove to carry less risk. If the borrower defaults, the bank might be able to recoup some of its loss through the sale of the vehicle.