Financial system determines the nature of the economy of any country and the growth of this economy should be strong so that the financial system grows and facilitates various kinds of investments and allocations of credits. However if the financial system faces a problem the base of the country is shaken up as everything depends on this (Polski, 2009). This was very prominent in the US when some disturbing elements primarily called systematic risks had crept in the system. Initially the financial system of the US was ever changing and large and people having assets were more interested in investing their money in various stocks present in the economy (James Bullard, 2009). The nature of the financial crisis was like the prices of houses started shooting up more than the country had ever witnessed, there was sharp increase in the non-prime loans which had adjustable interest rates which in turn led to an increment in the non-prime loan percentage. Also, these non-prime mortgage loans were purchased by to banking systems that practiced RMBMs or residential mortgage bank securities on its basis. This led to high rating assignments of the mortgage securities by agencies which in turn contribute to the creation of purchasing non-prime loans. As a result the proportion of loans went very high and the system of the mortgage loans were set to default banks and investors having RMBM and collateralized mortgage obligations (CMO) suffered substantial losses (Leverhulme, 2009).
Thus we see the growing disturbances or the emergence of systematic risks in the US financial system. It happened when the holders of assets we incapable to meet the increasing demands of liquidity. This is considered contagious as the problems faced by weak asset holders passes on to the strong and stable asset holder through claims (O’Byrne, 2015). The nature of the systematic risk varied from being default risk as a result of being asymmetric information. This is witnessed when there is failure on the art of a part to keep up to the expectation of a financial contract. This clearly highlights the fact that when an investor or any of its counterparts will get to know that the firm that they are dealing with is suffering a loss and has an unstable condition, these investors would stop preceding their business with these firms as it was witnessed in the Lehman Brothers case (Darryll Hendricks, 2006).