Another hat-tip to the Banking Law Prof blog for a pointer to this piece of testimony from Roger Cole of the US Federal Reserve on the sub-prime lending problems in the US.

From this, it looks like the Fed understand the problem much better than the US Senators in the banking committee – which is understandable. The problem is not serious to the banking system as a whole, but is serious for those banks that have been lending heavily in this way, as well as being serious for those losing their homes.

To me, this shows the banking system is working – one or a few banks start lending less than carefully, they lose money and close up. Where there is insurance it pays out. Lessons are learnt, models are updated and business processes re-examined. The system as a whole is not hurt, but helped by what has been learned.

The pity here is that the borrowers lose their homes – but they are homes they would not have been able to buy without the poor lending practices that were the problem in the first place.

The Senators, being politicians, have to play to the audience. After a while they will calm down and, if a serious problem is revealed, legislate then. We just have to live in hope that, unlike the Sarbanes-Oxley debacle, legislation is not passed in the heat of

the moment.