Chapter 5
SMFG's Response to Global Economic and Financial Turmoil

1. The U.S. subprime mortgage crisis

When U.S. home prices declined steeply after peaking in the first half of 2006, delinquency rates began to rise in subprime mortgages (mortgage loan for borrowers with lower credit scores). In 2007, many subprime mortgage-backed securities received sharp downgrades in credit ratings. In August 2007, BNP Paribas, a major French bank, announced that it was halting redemption on investment funds that were managed in collateralized debt obligations (CDOs). The bank specified the reason as the reduced liquidity in the U.S. securities market, which disabled the proper valuation of net assets.

At Sumitomo Mitsui Banking Corporation (SMBC), the Treasury Unit began to sell subprime mortgage-backed securities in 2007, as the market value of those securitized products dropped, and cashed out most of the relevant assets before the market crashed. Thus, SMBC reduced subprime mortgage-related losses to minimal levels.