Final answer:
Smaller banks tend to have more subprime mortgage defaults than larger banks. True
Step-by-step explanation:
During the 2007-2008 financial crisis, the higher incidence of subprime mortgage defaults in smaller banks can be attributed to several factors. Smaller banks often lacked the robust risk management infrastructure and diversified portfolios that larger banks had in place. They were more heavily invested in local markets, where the impact of the housing market collapse was often more pronounced. Additionally, smaller banks were sometimes more reliant on short-term funding, making them vulnerable to liquidity pressures when the value of mortgage-backed securities plummeted.
The lending practices of smaller banks also played a role, as they were more likely to engage in riskier lending, offering subprime mortgages to borrowers with less-than-ideal credit histories. This strategy, while potentially yielding higher profits in the short term, exposed these banks to a greater risk of defaults when the housing bubble burst.
The higher subprime mortgage defaults in smaller banks during the financial crisis were a result of their vulnerability to market fluctuations, limited risk management capabilities, and a higher concentration of high-risk assets in their portfolios.