anatomy of the global finance crisis

Anatomy of the global financial crisis

International Finance

Vasja Rant10 November 2008

Presentation outline: key points about the global financial crisis

Origins – where and why did the crisis break out? Transmission – why has the crisis spread so

rapidly beyond the point of origin and around the world?

Timeline – how has the crisis evolved? What were the key events?

Policy response – which actions have been taken to solve the crisis so far?

Costs – what have been the costs of the crisis so far? What are the expected final costs?

1. Origins

Two views of the reasons for the outbreak of the crisis in the U.S.

Narrow view: deterioration of the U.S. subprime mortgage market

Broad view: factors contributing to the build-up of problems in the U.S. housing market

• Origins – narrow viewCollapse of the house-price bubble (1)

50

70

90

110

130

150

170

190

210

Nominal Home Price Index (2000Q1=100)Real Home Price Index (2000Q1=100)

• Origins – narrow viewCollapse of the house-price bubble (2)

The 1997-2006 house-price bubble was in fact the largest The 1997-2006 house-price bubble was in fact the largest speculative surge of real housing prices in the U.S. since 1950!speculative surge of real housing prices in the U.S. since 1950!

Notice the Notice the prolonged prolonged

exponential exponential growth!growth!

• Origins – narrow viewRising loan defaults (1)

Collapse of the house-price bubble coincided with a surge in Collapse of the house-price bubble coincided with a surge in loan defaults in the market for residential mortgages.loan defaults in the market for residential mortgages.

• Origins – narrow viewRising loan defaults (2)

Rising defaults were the Rising defaults were the most problematic in the most problematic in the recent loan vintages on the recent loan vintages on the “subprime” market “subprime” market segment (2007 is the worst segment (2007 is the worst vintage). vintage).

% of % of delinquent delinquent loans (60+ loans (60+

days)days)

Months from originationMonths from origination

U.S. residential mortgage market

“Prime”Loan to value < 80%

Good credit score“Non-prime”

“Conforming”Small principal

(< conforming limit)

“Jumbo”Large principal

(> conforming limit)

“Near-prime (Alt-A)”Loan to value ~ 80-90%Intermed. credit score

“Subprime”Loan to value > 90%

Bad credit score

Government guarantee and GSE securitization Fannie Mae, Freddie Mac…

Private securitization marketCountrywide financial, Bear Stearns, Lehman Brothers, Bank of America, Wells Fargo, Washington Mutual…

• Origins – narrow viewResidential mortgage market (1)

• Origins – narrow viewResidential mortgage market (2)

The share of subprime increased by 130% from 2003 to 2005!The share of subprime increased by 130% from 2003 to 2005! The percent of securitized new loans increased by 60% from The percent of securitized new loans increased by 60% from

2001 to 2005!2001 to 2005!

Share of subprimeShare of subprimeIn total U.S. economy In total U.S. economy (measured by GDP): (measured by GDP): 1% (2001), increasing 1% (2001), increasing to 5% (2005)to 5% (2005)

U.S. residentialU.S. residentialmortgage mortgage productsproducts

Fixed rate Fixed rate mortgage mortgage

(FRM)(FRM)

Adjustable rate Adjustable rate mortgage mortgage

(ARM)(ARM)

Other products

(non-classical)

Products with flexible debt

servicing (I/O, payment options)

Products with flexible interest rate structure

(FRM/ARM hybrids)

GREATER RISKS:1. Flexible payments increase

chances of terminal default.2. Debt servicing may increase

15-30% upon FRM/ARM resetting.

• Origins – narrow viewResidential mortgage products

House prices are House prices are centralcentral to the U.S. to the U.S. subprime mortgage subprime mortgage market modelmarket model

If If house priceshouse prices are are risingrising & & interest ratesinterest rates are are lowlow:: Additional home equity Additional home equity

due to price due to price appreciationappreciation

Borrowers can repay Borrowers can repay their loans by their loans by refinancing.refinancing.

Example of refinancing:Example of refinancing:

Home Home value: value:

$200.000$200.000

Mortgage Mortgage loan: loan:

$200.000$200.000

HomeHomevalue: value:

$300.000$300.000

After 1 yearAfter 1 year

MortgageMortgageloan: loan:

$300.000$300.000

Repayment Repayment of initial of initial loan: loan: $200.000$200.000

Cash remainingCash remaining$100.000$100.000

• Origins – narrow viewFrom house prices to debt servicing (1)

If If house priceshouse prices are are fallingfalling & & interest rates interest rates are are highhigh:: No or negative new No or negative new

home equityhome equity Repayment of loans by Repayment of loans by

refinancing not refinancing not possiblepossible

Borrowers faced with Borrowers faced with increasincreased debt ed debt servicingservicing difficulties. difficulties.

Figure:Figure: Interest rate Interest rate

movements on U.S. movements on U.S. mortgage market mortgage market (hybrid ARM rates).(hybrid ARM rates).

• Origins – narrow viewFrom house prices to debt servicing (2)

• Origins – narrow viewAnd from debt servicing to house prices

Mortgage loans have an implicit “put” option In times of increasing house prices

Home value > Loan value repayment of loan is in the interest of the borrower (the borrower will service the loan)

In times of decreasing house prices Home value < Loan value repayment of loan is not in the interest of the borrower (the borrower may default)

Defaults lead to foreclosures Additional supply of the housing stock at forced

sales prices; Downward pressure on house prices and

increased loan delinquencies (feedback loop).

Macroeconomic factors Global and local (U.S.) economic

environment in the years preceding the crisis

Microeconomic factors Structural characteristics of the mortgage

market model (“originate and distribute”)

• Origins – broad viewReasons for the house-price bubble

Global saving imbalances U.S. current account deficit recently as high as 6% of U.S.

GDP! Financing provided by capital inflows from Asian countries and oil exporters.

Implication: infusion of liquidity into international financial system, searching for yield

Low equity yields Substantial declines in stocks after collapse of the dot-com

bubble (2000). Implication: incentives to invest into new instruments with

favorable risk-return profile Low interest rates

Lowest interest rates on 30-year record due to agressive U.S. monetary policy

Implicaton: incentives to borrow for those who would normally never be able to afford it

• Origins – broad viewMacroeconomic factors

• Origins – broad viewMacroeconomics – saving imbalances (1)

• Origins – broad viewMacroeconomics – saving imbalances (2)

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

U.S. current acount balance (% GDP)

• Origins – broad viewMacroeconomics – equity yields

• Origins – broad viewMacroeconomics – interest rates

High risk mortgage products Non-classical, flexible mortgage products opened access to

credit to high risk individuals. Failure #1: underestimation of risk in loan products; risk

due to non-classical products not fully accounted for; Predatory lending practices

Widespread availability of credit fueled demand for housing and the house-price boom

Failure #2: poor underwriting stanadards in loan origination; loans made to individuals with poor or no credit histories, no documentation, no regular income; lending based entirely on home value!

• Origins – broad viewMicroeconomic factors (1)

Securitization and structured finance Transfer of risk (“originate and distribute” model) freed

loan potential for new lending cycles Failure #3: underestimation of risk in structured finance

products; risk-assesment models failed due to multi-layer structuring and dispersion of risk.

Failure #4: monitoring of risk in structured finance products delegated to credit rating agencies with (1) no real “value at risk”, except reputation and (2) conflict of interest with the issuer of securities

Failure #5: poor underwriting standards in loan securitization (securities issued despite failures #3 and #4)

Failure #6: intransparent legal design of securitization process; widespread use of off-balance sheet entities

• Origins – broad viewMicroeconomic factors (2)

1. Transmission Two necessary conditions for fast transmission of the

crisis Widespread use of risk transfer mechanisms – securitization

and structured finance Strong demand for derivative securities – due to global

macroeconomic environment Two sufficient conditions for fast transmission of the

crisis Strong increase in uncertainty (asymmetric information) –

investors unable to determine the outcome of their decisions

Strong increase in risk aversion – investors not willing to take on new risk

Two key phases in transmission Transmission to institutional investors Transmission to banks

• TransmissionSecuritization & risk transfer (1)

Mortgage Mortgage loansloans

Total value:Total value:$900.000$900.000

Mortgage loan portfolio Mortgage loan portfolio can be divided into 9.000 can be divided into 9.000

bonds with $100 face falue. bonds with $100 face falue. Different tranches of bonds Different tranches of bonds

carry different levels of carry different levels of risk depending on their risk depending on their

seniority/subordination in seniority/subordination in debt repayment.debt repayment.

1. tranche 1. tranche (low risk)(low risk)

3.000 bonds at $1003.000 bonds at $100Coupon rate: 10 % Coupon rate: 10 %

2. tranche2. tranche(medium risk)(medium risk)

3.000 bonds at $1003.000 bonds at $100Coupon rate: 15 %Coupon rate: 15 %

3. tranche3. tranche(high risk)(high risk)

3.000 bonds at $1003.000 bonds at $100Coupon rate: 20 %Coupon rate: 20 %

SecuritizationSecuritization

Mortgage backed securities (MBS) Mortgage backed securities (MBS)

Demand:Demand:financial financial investorsinvestors

Supply:Supply:originatorsoriginatorsof mortgageof mortgageloans loans

Credit enhancement facilitiesCredit enhancement facilities External:External:

Bond insurance – monoline insurers;Bond insurance – monoline insurers; Letter of credit – banks.Letter of credit – banks.

Internal:Internal: Overcollateralization: assets (underlying loans)>liabilities Overcollateralization: assets (underlying loans)>liabilities

(issued securities);(issued securities); Excess spread: lending rate (underlying loans) >borrowing Excess spread: lending rate (underlying loans) >borrowing

rate (issued securities);rate (issued securities); Reserve account: established to absorb losses;Reserve account: established to absorb losses; Senior/subordinated debt structure: pecking order in Senior/subordinated debt structure: pecking order in

absorption of loan losses to derivative securities (equity absorption of loan losses to derivative securities (equity tranche first, senior tranches last).tranche first, senior tranches last).

Liquidity facilities – sponsor banks provide liquidity in Liquidity facilities – sponsor banks provide liquidity in case of cash shortages due to redemptionscase of cash shortages due to redemptions

• TransmissionThe key to AAA ratings in securitization

OriginatorOriginator

End borrowersEnd borrowers

Conduit/trust/ Conduit/trust/ SPV/SPE/SIVSPV/SPE/SIV

Investment bank Investment bank (underwriter)(underwriter)

Rating agencyRating agency Institutional Institutional investorinvestor

End lendersEnd lenders

Insurance Insurance companycompany

BrokerBroker

ServicerServicer

$$

$$

$$

$$

$$

MortgagesMortgages

MortgagesMortgages

MBSMBS

I&P ($)I&P ($)

I&P ($)I&P ($)

MBS, I&P ($)MBS, I&P ($)

Financial Financial returns ($)returns ($)

LEGEND KEYLEGEND KEYO&G – interest and principalO&G – interest and principalSPV – special purpose vehicleSPV – special purpose vehicleSPE – special purpose enterpriseSPE – special purpose enterpriseSIV – special investment vehicleSIV – special investment vehicleMBS – mortgage backed securitiesMBS – mortgage backed securities

Founder: loan originator or Founder: loan originator or investment bankinvestment bank

Purpose: transfering Purpose: transfering ownerhship of claims (loans) ownerhship of claims (loans) and collateral (mortgages) in and collateral (mortgages) in order to issue mortgage order to issue mortgage backed securities (bonds).backed securities (bonds).

Exposure of founder: implicit Exposure of founder: implicit guarantee in case of large guarantee in case of large losses.losses.

Assigns credit Assigns credit rating to issued rating to issued MBSs.MBSs.

Organizes issuing of Organizes issuing of MBSs and places MBSs and places MBSs to investors in MBSs to investors in financial markets.financial markets.

Broker places mortgage Broker places mortgage loans to borrowers for feeloans to borrowers for fee

Manages the flow of Manages the flow of interests and principal interests and principal (I&P); usually, but not (I&P); usually, but not necessarilly the Originator necessarilly the Originator

Typically a specialized Typically a specialized mortgage bankmortgage bank

Banks, insurance Banks, insurance companies, mutual companies, mutual funds, hedge funds, hedge funds…funds…

Can assume part of Can assume part of risks (insurance of risks (insurance of mortgage loans, mortgage loans, insurance of MBS insurance of MBS returns).returns).

• TransmissionThe players in securitization

Mortgage bondsMortgage bondsRating: AAA/AaaRating: AAA/Aaa

Mortgage bondsMortgage bondsRating: AA/Aa2Rating: AA/Aa2

Mortgage bondsMortgage bondsRating: A/A2Rating: A/A2

Mortgage bondsMortgage bondsRating: BBB/Baa2Rating: BBB/Baa2

Mortgage bondsMortgage bondsRating: BB/Ba2Rating: BB/Ba2

Mortgage bondsMortgage bondsRating: B/B2Rating: B/B2

““Equity” trancheEquity” tranche

Mortgage backed securities (MBS) Mortgage backed securities (MBS)

InvestmentInvestmentgradegrade

Speculative Speculative gradegrade

CDOCDORatings: AAA/Aaa – BBB/Baa2Ratings: AAA/Aaa – BBB/Baa2

CDOCDORatings: less than BBB/Baa2Ratings: less than BBB/Baa2

Collateralized debt obligations (CDO)Collateralized debt obligations (CDO)

InvestmentInvestmentgrade grade

MBSMBS

Other Other claimsclaims


A mil. $ question: A mil. $ question: if I am a sponsor bank if I am a sponsor bank of the SIV that issued of the SIV that issued

CDO2, what is my CDO2, what is my risk exposure?risk exposure?


RMBS – residential mortgage backed RMBS – residential mortgage backed securitiessecurities

CMBS – commercial mortgage backed CMBS – commercial mortgage backed securitiessecurities

MBS – mortgage backed securitiesMBS – mortgage backed securities ABS – asset backed securitiesABS – asset backed securities CDO – collateralized debt obligationsCDO – collateralized debt obligations CDS – credit default swapsCDS – credit default swaps

• TransmissionStructured finance instruments & volumes

• TransmissionStructured finance portfolio ratings & underlying claims

• TransmissionStructured finance funding profile & ABCP underlying claims

Key question Key question

Why has a crisis in a relatively narrow segment of the U.S. Why has a crisis in a relatively narrow segment of the U.S. financial system send such strong shockwaves through the U.S. financial system send such strong shockwaves through the U.S. and international financial environment?and international financial environment?

ExplanationsExplanations

Investor miopiaInvestor miopia – excessive focus on yield and insufficient focus – excessive focus on yield and insufficient focus on risk due to benign international financial environment.on risk due to benign international financial environment.

Difficulties in estimating risks Difficulties in estimating risks – failure of risk assessment – failure of risk assessment models for structured finance instruments, which are not models for structured finance instruments, which are not actively traded in the secondary markets (such as CDO and actively traded in the secondary markets (such as CDO and CDO2).CDO2).

• TransmissionPart 1: institutional investors (1)

Over reliance on credit rating agencies Over reliance on credit rating agencies – systematic large – systematic large downgrades of MBS credit ratings since July 2007 cause panic downgrades of MBS credit ratings since July 2007 cause panic among investors and subsequent “flight to quality” among investors and subsequent “flight to quality” repricing repricing of risk!of risk!

Contagion effectContagion effect – a lack of confidence spread from the narrow – a lack of confidence spread from the narrow MBS segment to the wider ABS segment, which is based on a MBS segment to the wider ABS segment, which is based on a much broader pool of claims, including corporate bonds, much broader pool of claims, including corporate bonds, student loans, car leases, credit card payments etc.student loans, car leases, credit card payments etc.

Deleveraging (unwinding of credit)Deleveraging (unwinding of credit) – investors’ lack of – investors’ lack of condifence condifence fire sales of structured finance instruments fire sales of structured finance instruments forced liquidation of SIV/SPV/SPE assets forced liquidation of SIV/SPV/SPE assets falling prices of falling prices of illiquid structured finance instruments illiquid structured finance instruments further lack of further lack of confidence confidence accelerated fire sales of structured finance accelerated fire sales of structured finance instruments… instruments…

• TransmissionPart 1: institutional investors (2)

• TransmissionIncrease in uncertainty: unreliable credit ratings for mortgage derivative securities

Record drops Record drops in pricesin prices

Record increases Record increases in risk premiumsin risk premiums

• TransmissionIncrease in risk aversion (1): from residential to commercial mortgages

• TransmissionIncrease in risk aversion (2): from mortgage to other asset derivatives

• TransmissionIncrease in risk aversion (3): from derivatives to corporate debt market

Key questionKey question How has the crisis jumped from institutional investors to the How has the crisis jumped from institutional investors to the

interbank market?interbank market?

ExplanationsExplanations

Realization of contingent liabilitiesRealization of contingent liabilities of banks to various of banks to various investment vehiclesinvestment vehicles Important initial role of short-term ABCP (asset backed commercial Important initial role of short-term ABCP (asset backed commercial

papers) exposed to U.S. subprime market in transmission of the crisis. papers) exposed to U.S. subprime market in transmission of the crisis. They are particularly vulnerable to refinancing risk.They are particularly vulnerable to refinancing risk.

Conduits issuing ABCPs were established & sponsored by several Conduits issuing ABCPs were established & sponsored by several european banks. As they came under pressure due to investors’ european banks. As they came under pressure due to investors’ redemptions some banks withdrew their support redemptions some banks withdrew their support signal that banks signal that banks may have difficulties in meeting their obligations!may have difficulties in meeting their obligations!

• TransmissionPart 2: banks (1)

Non-functioning of the securitization market Non-functioning of the securitization market – banks can no – banks can no longer transfer risks off their balance sheets (problems with longer transfer risks off their balance sheets (problems with pending LBOs). Unwanted claims put pressure on banks’ capital pending LBOs). Unwanted claims put pressure on banks’ capital adequacy.adequacy.

Hoarding of liquidity by banks Hoarding of liquidity by banks – due to high uncertainty, banks – due to high uncertainty, banks create a dangerous liquidity crunch in the interbank marketcreate a dangerous liquidity crunch in the interbank market Banks build-up their own precautionary cash reserves against Banks build-up their own precautionary cash reserves against

realization of unforseen contingent liabilities.realization of unforseen contingent liabilities. Banks stop lending to each other because of adverse selection Banks stop lending to each other because of adverse selection

(lack of confidence)(lack of confidence)

Hoarding of liquidity by non-financial companiesHoarding of liquidity by non-financial companies – Due to – Due to observed liquidity shortages in the market, companies try to observed liquidity shortages in the market, companies try to secure cash (for example, by drawing on their credit lines), secure cash (for example, by drawing on their credit lines), creating further liquidity pressures for banks.creating further liquidity pressures for banks.

• TransmissionPart 2: banks (2)

• TransmissionIncrease in banks’ credit and liquidity risk

Outbreak phase (summer 2007 – fall 2007), marked by: First awareness of the crisis in the general public First period of interbank liquidity crunch and massive

central bank interventions First isolated bank failures (Northern Rock)

Deleveraging phase (winter 2007 – summer 2008), marked by: Build-up of losses in the financial system (banks’ write-

offs and balance sheet clean-ups) First significant round of bank recapitalizations (large

role of sovereign wealth funds due to lack of private investors )

Continued isolated bank failures (Bear Stearns)

• TimelineThree phases of key crisis events (1)

Escalation phase (fall 2008-now) – marked by: Failures or near failures of large, systemically important

financial institutions (investment banks, insurance companies, commercial banks and thrifts) – Lehman Brothers, AIG, Washington Mutual, Fortis, Hypo Real, Royal Bank of Scotland, HBOS, Bradford & Bingley…

Second period of interbank liquidity crunch Development of a credit crunch for non-financial

companies and households (worsening of real economy) Significant wealth effects (large declines in stock prices) Unprecedented public interventions by central banks

and governments around the world Balance of payments crises (smaller countries) & first

interventions by the International monetary fund

• TimelineThree phases of key crisis events (1)

• TimelineOutbreak phase

First signs of trouble already in the first half of 2007 Mouniting losses due to subprime loans (HSBC) Problems of funds involved in the secondary market for

mortgage securitizations (Bear Stearns) Problems of institutional investors that invested in morgage

derivatives (IKB, WestLB). Systematic downgrades of credit ratings of mortgage

derivatives since July 2007 Result: rapid redemptions of derivative securities by

institutional investors Significant outbreak in august 2007

Problems of three funds of BNP Paribas BNP Paribas stops redemptions in funds due to “difficulties

in valuation of funds’ U.S. investments”. Result: investors panic, massive sell-offs create the first

liquidity crunch.

• TimelineDeleveraging phase

Rapid liquidation of positions in mortgage and assed based securities by institutional investors

Losses are absorbed by institutions involved in the securitization process – significant write-offs, particularly among banks

Write-offs of losses create need for fresh capital. In the absence of sufficient private capital, financial institutions resort to sovereign wealth funds (SWFs involved in 60% of all recapitalizations by decemeber 2007).

Write-offs, capital raised, and central bank liquidity interventions create some transparency in the interbank market, easing the liquidity crunch.

• TimelineEscalation phase (1)

By late summer 2008 deleveraging is endangering soundness of large, systemically important financial institutions.

First sign of serious trouble: nationalization of Fannie Mae and Freddie Mac by the U.S. government due to insolvency (7.9.) – both GSEs stand behind more than 50% of all U.S. mortgages.

Key event in escalation phase: Lehman Brothers (investment bank) files for bankruptcy on 15.9. Lehman is the underwriter of large volumes of derivative

securities Immediate and significant increase in counter-

party risk Events unfold with rapid pace: all remaining Wall

Street investment banks restructured or sold within a week, U.S. govenment rescues insurance giant AIG (16.9), governments around the world scramble to rescue their banks, some prove too small for this task (Iceland, Hungary, also other smaller nations).

Inter-bank lending grinds to a halt, bringing down credit flow to the real economy along.

Crisis begins spilling over to the real economy (problems with consumptino of durables, i.e. car industry)

• TimelineEscalation phase (2)

1. Policy response

Two phases in policy response based on crisis timeline Outbreak and delevereging phase

Key feature: case-by-case approach and involvement of other actors (sovereign wealth funds) in addition to national governments & central banks

Escalation phase Key feature: systemic approach and crucial role of

national governments & central banks

Central banksCentral banks Liquidity measures Liquidity measures – cash provided in exchange for – cash provided in exchange for

securities that “nobody else wants” in order securities that “nobody else wants” in order to ease to ease tensions in the interbank markettensions in the interbank market.. ECB, Fed and other central banks ECB, Fed and other central banks

Monetary policy measures Monetary policy measures – reductions of reference interest – reductions of reference interest rates with the objective to stimulate U.S. growth and to rates with the objective to stimulate U.S. growth and to ease conditions in the mortgage marketsease conditions in the mortgage markets FedFed

• Policy responseOutbreak and deleveraging phases (1)

National governmentsNational governments Bailouts of failed banksBailouts of failed banks – nationalization in case of Northern – nationalization in case of Northern

Rock, government-sponsored takeover (by JP Morgan Rock, government-sponsored takeover (by JP Morgan Chase) in case of Bear Stearns, with the objective to Chase) in case of Bear Stearns, with the objective to contain systemic risks – problem of moral hazard! contain systemic risks – problem of moral hazard!

Measures to improve the conditions in the mortgage Measures to improve the conditions in the mortgage marketmarket (U.S.) – moratorium on loan repayments, increased (U.S.) – moratorium on loan repayments, increased authority for intervention by government sponsored authority for intervention by government sponsored enterprises (GSEs) both in granting guarantees and enterprises (GSEs) both in granting guarantees and securitizationsecuritization

Banks and other playersBanks and other players Balance sheet clean-up and recapitalizationBalance sheet clean-up and recapitalization of large banks – of large banks –

substantial role of the so called sovereign wealth funds.substantial role of the so called sovereign wealth funds.

• Policy responseOutbreak and deleveraging phases (2)

Central banksCentral banks Liquidity measures Liquidity measures – cash provided in exchange for – cash provided in exchange for

securities that “nobody else wants” in order securities that “nobody else wants” in order to ease to ease tensions in the interbank markettensions in the interbank market and prevent credit crunch. and prevent credit crunch. ECB, Fed and other central banksECB, Fed and other central banks Measures extended to non-member countries in case Measures extended to non-member countries in case

of ECB (Hungary, Denmark…)of ECB (Hungary, Denmark…) Monetary policy measures Monetary policy measures – reductions of reference interest – reductions of reference interest

rates with the objective to stimulate growth around the rates with the objective to stimulate growth around the world and prevent credit cruchworld and prevent credit cruch Fed, ECB and other central banksFed, ECB and other central banks

• Policy responseEscalation phase (1)

National governments (1)National governments (1) Earmarked rescue packages Earmarked rescue packages – governments adopt a – governments adopt a

systemic approach; rescue packages designed to prevent systemic approach; rescue packages designed to prevent collapse of national banking systems – sizes of packages:collapse of national banking systems – sizes of packages: U.S. U.S. – 700 bn USD– 700 bn USD EU EU – 1.300 bn EUR (1.800 bn USD); of this Germany (500 – 1.300 bn EUR (1.800 bn USD); of this Germany (500

bn EUR), France (360 bn EUR), UK (300 bn GBP)bn EUR), France (360 bn EUR), UK (300 bn GBP) Recapitalizations and partial nationalizationsRecapitalizations and partial nationalizations of national of national

banking systems – crucial role of national government banking systems – crucial role of national government funds (initially ad hoc, later based on earmarked rescue funds (initially ad hoc, later based on earmarked rescue packages).packages).

Government guaranees for interbank loans Government guaranees for interbank loans – the aim is to – the aim is to help start interbank lending, which would unlock the credit help start interbank lending, which would unlock the credit crunch (based on earmarked rescue packages). crunch (based on earmarked rescue packages).

Unlimited or increased government deposit insurance Unlimited or increased government deposit insurance – the – the aim is to build depositors’ confidence in the banking system aim is to build depositors’ confidence in the banking system and prevent bank runs (based on earmarked rescue and prevent bank runs (based on earmarked rescue packages). packages).


National governments (2)National governments (2) Direct central bank lending channel to non-financial Direct central bank lending channel to non-financial

companies companies – the aim is to circumvent non-performing – the aim is to circumvent non-performing banking system and prevent real effects of the credit banking system and prevent real effects of the credit crunch (only Fed adopted this measure).crunch (only Fed adopted this measure).

International levelInternational level Involvement of the International monetary fund Involvement of the International monetary fund – objective – objective

is to help countries facing balance of payments difficulties is to help countries facing balance of payments difficulties due to financial crisis; proposals about possible increased due to financial crisis; proposals about possible increased role of the Fund in this respect. role of the Fund in this respect.

Beginning of talks about a substantial remaking of the Beginning of talks about a substantial remaking of the internatinal financial system internatinal financial system – talks will be launched at – talks will be launched at presidential/prime minister level in the G-20 forum on 15 presidential/prime minister level in the G-20 forum on 15 November in Washington D.C.November in Washington D.C.


• CostsEstimated final costs of the crisis

Billions USD October 07 March 08 October 08 Estimated losses on loans 40 225 425 Estimated losses on securities 200 720 980 Total estimated losses, of which: 240 945 1.405

Banks n.a 440-510 725-820 Insurance companies n.a 105-130 160-250 Pension and mutual funds n.a 90-160 125-250 GSE and government n.a 70-140 100-135 Other (hedge funds etc.) n.a 110-200 115-225

Source: International monetary fund

• CostsDocumented costs (banks only)

Billions USD Bank write-offs and losses Bank recapitalizations Europe 227 177 Americas 339 235 Asia and the Middle East 24 22 Total 591 434 Source: Bloomberg (29.9.2008)

• CostsComparison of financial crises

anatomy of the global finance crisis

Economy & Finance