It is really nice to observe that many nations are concentrating to regulate their banks by various policies and follow up. The international attention is drawn to the recent stress test conducted on the European banks last week. It is high time that such tests are conducted in a scientific way to analyze the strength of the banks to absorb the unexpected shocks.

The basic aim as stated by the study for the stress test is to see how far the capital of the banks is adequate to meet the future demands when the lending picks up due to the economic growth. Side by side the meeting at Basel for arriving the consensus to increase the capital requirement of banks with international standard is also aiming to improve the health of the banks.

The political will should prevail in various countries if the financial system is to be put on track and to avoid sovereign defaults. The crisis in Greece must be an eye opener for all the nations worldwide to keep their house in order to avoid the impact on other trade partners. It is in fact, gratifying to note that only seven banks failed the stress test out of 91 on whom the test was conducted in Europe.

Stress test indicates the extent of capital infusion needed for such failed banks to enable them to undertake the normal banking activity to ensure the growth of the nation. The USA also conducted such test and instructed the failed banks to raise their capital. In a way, it is a good beginning to set right the banks to deliver the goods to the society without siphoning the taxpayers money.

Whenever a bank or a financial institution is coming across the bad loans especially in the mortgage loans, they try to sell the securities. These are called mortgage backed securities. They normally sell it in a bundle to other institutions who are willing to buy the same in order to improve the liquidity.

Once such mortgage backed securities are sold they are taken away from the balance sheet of the bank or the institution which had sold it. This cleans the balance sheet and offers the fund to recycle for loaning activity. The recent failure of so many banks under mortgage loans in the USA due to the failure of the people to repay the loan resulted in the sale of such bad loans

If the banks do not follow the basic ethics of extending the loans, the resultant bad loans leads to the liquidity crisis. Hence, the banks are bound to sell the mortgage backed securities at a discounted rate and raise the fund to lend further. In all mortgage creation protects the banks to minimize the extent of default.

Consumer durable Finance is encouraged in the banks and private financial institutions nowadays. When the spread has come down heavily on account of increase in the cost of funds this avenue helps the lenders to boost up the bottom line.

At the same time the recovery percentage in this sector is also at a reasonable level since the salaried class constitutes the borrowing comity. Since existing customers with good track record are funded under this schemes the rate of default is minimum.