global financial crisis by anil.j

8/14/2019 Global Financial Crisis by anil.j

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GLOBAL FINANCIALGLOBAL FINANCIAL

CRISISCRISIS

GBS,HubliGBS,Hubli


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MeaningMeani

ng

The term financial crisis is applied broadlyThe term financial crisis is applied broadlyto a variety of situationsto a variety of situations

Usually, some financial institutions orUsually, some financial institutions or

assets suddenly lose a large part of theirassets suddenly lose a large part of their

valuevalue

Banking Panics (and recessions)Banking Panics (and recessions)

Stock market crashesStock market crashesBursting of financial bubblesBursting of financial bubbles

Currency crisisCurrency crisis

Sovereign defaultsSovereign defaults


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CausesCausesThe International Financial CrisisThe International Financial Crisis

Started with Losses in the USStarted with Losses in the US

Housing MarketHousing Market..

(Macro-Economic cause):(Macro-Economic cause):

Profligate Lending Led to Losses.Profligate Lending Led to Losses.

(Micro-Economic): Excessive(Micro-Economic): Excessive

Land Use RegulationLand Use Regulation

exacerbated Lossesexacerbated Losses..


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StagesSta

ges First, it began with the housing bubble in the U.S.First, it began with the housing bubble in the U.S.

that was increasingly inflated by sub prime andthat was increasingly inflated by sub prime andnear prime mortgage lending.near prime mortgage lending.

It spread into other types of assets and affectedIt spread into other types of assets and affectednot only mortgage companies and specializednot only mortgage companies and specialized

investment banks, but also universal banks.investment banks, but also universal banks. It induced the global liquidity crisis accompaniedIt induced the global liquidity crisis accompanied

by a massive pullout of liabilities from the mostby a massive pullout of liabilities from the mostseverely exposed banks, i.e. Northern Rock, Bearseverely exposed banks, i.e. Northern Rock, Bear

Stearns and, later, Lehman Brothers, triggeringStearns and, later, Lehman Brothers, triggeringanxiety about possible credit contagion fromanxiety about possible credit contagion fromcounterparty risk on the global scale.counterparty risk on the global scale.

Fourth, the collapse of structured investmentFourth, the collapse of structured investment

products, mainly collateralized debt obligationsproducts, mainly collateralized debt obligations(CDOs), shifted the global liquidity allocations into(CDOs), shifted the global liquidity allocations into


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Subprime loansSub

prime loans

Subprime lending is theSubprime lending is thepractice of lending mainlypractice of lending mainly

in the form of mortgagesin the form of mortgages

for the purchase offor the purchase of

residences, to borrowersresidences, to borrowerswho do not meet thewho do not meet the

usual criteria forusual criteria for

borrowing at the lowestborrowing at the lowest

prevailing market interestprevailing market interestrate .rate .

Sub prime loans areSub prime loans are

those made to leastthose made to least

credit worthy applicants.credit worthy applicants.


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IMPACTIMPACT

Banks were the major cause for the crisisBanks were the major cause for the crisisand they them self were the first to suffer.and they them self were the first to suffer.

A crisis signaling the decline of USsA crisis signaling the decline of USs

superpower statussuperpower status

Collapse of giant financial institutions likeCollapse of giant financial institutions like

Lehman Bros and many othersLehman Bros and many others

Fall in a stock marketFall in a stock market

AIG was rescued for $85 billion credit fromAIG was rescued for $85 billion credit fromgovt.govt.

Merrill lynch was taken over by BOAMerrill lynch was taken over by BOA


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SecuritizationSecuritization


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SecuritizationSecuritizationWhat is securitization?What is securitization?It refers to the process of liquidating the illiquidIt refers to the process of liquidating the illiquid

and long term assets like loans and receivables ofand long term assets like loans and receivables of

financial institution like banks by issuingfinancial institution like banks by issuing

marketable securities against them.marketable securities against them.

The following are the assets generally securitizedThe following are the assets generally securitized

by financial institutionby financial institutionCredit card receivablesCredit card receivables

Hire purchase loans like vehicle loansHire purchase loans like vehicle loans

Mortgage loans etc..Mortgage loans etc..


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The various stages involved in theThe various stages involved in the

working of securitization are as followsworking of securitization are as follows

Identification stageIdentification stage

Transfer stageTransfer stage

Issue stageIssue stage

Redemption stageRedemption stage

Credit rating stageCredit rating stage


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RedemptionRedemption

stagestage

The redemption stage and repayments o The redemption stage and repayments ofinterest on these securities are facilitatedinterest on these securities are facilitated

by collections received by the SPV fromby collections received by the SPV fromthe securitization assets. The task othe securitization assets. The task ofcollection of dues is generally entrusted tocollection of dues is generally entrusted tothe originator or special servicing agentthe originator or special servicing agent

can be appointed for this purpose. Thiscan be appointed for this purpose. Thisagency is paid a certain percentage oagency is paid a certain percentage ofcommission for the collection servicecommission for the collection servicerendered.rendered.


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Credit ratingCredit rating

The pass through certificates have to be The pass through certificates have to be

publicly issued require credit rating by apublicly issued require credit rating by a

good credit agency so that they becomesgood credit agency so that they becomes

more attractive and easily acceptable .more attractive and easily acceptable .

Pass through certificates like debentures,Pass through certificates like debentures,

these certificates before maturity arethese certificates before maturity aretradable in secondary market to ensuretradable in secondary market to ensure

liquidity for the investors.liquidity for the investors.


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Impact ofImpact ofsecuritizationsecuritization

Banks borrowed even more money to lend out soBanks borrowed even more money to lend out sothey could create more securitization. Somethey could create more securitization. Some

banks didnt need to rely on savers as much then,banks didnt need to rely on savers as much then,

as long as they could borrow from other banksas long as they could borrow from other banks

and sell those loans on as securitiesand sell those loans on as securities

Some investment banks like Lehman Brothers gotSome investment banks like Lehman Brothers got

into mortgages, buying them in order tointo mortgages, buying them in order to

securitize them and then sell them on.securitize them and then sell them on.

Running out of who to loan to, banks turned toRunning out of who to loan to, banks turned to

the poor; the sub prime, the riskier loans. Risingthe poor; the sub prime, the riskier loans. Rising

house prices led lenders to think it wasnt toohouse prices led lenders to think it wasnt too

risky; bad loans meant repossessing high-valuedrisky; bad loans meant repossessing high-valued


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CDOCDOs:s:Collateralized debt obligations (CDOs)

are a type of structured asset-backedsecurity (ABS) whose value and paymentsare derived from a portfolio of fixed-incomeunderlying assets. A CDO is nothing morethan a redistribution of credit risk.

CDOs are unique in that they represent

different types of debt and credit risk. Inthe case of CDOs, these different types ofdebt are often referred to as 'trenches' or'slices'. Each slice has a different maturity

and risk associated with it. The higher the


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Networking of banks acrossNetworking of banks across

the globethe globe

Networking of banks here means theNetworking of banks here means the

exposure of one bank to other bank.exposure of one bank to other bank.

Monetary ExposureMonetary Exposure

Eg: Country's largest private sector lender,Eg: Country's largest private sector lender,

ICICI Banks London subsidiary had 57ICICI Banks London subsidiary had 57

million Euro (about Rs 375 crore) exposuremillion Euro (about Rs 375 crore) exposure

in the Lehman Brothers which filedin the Lehman Brothers which filed

bankruptcy.bankruptcy.

Investors rushed to sell shares of ICICI BankInvestors rushed to sell shares of ICICI Bank

Ltd, dragging the banks stock down by atLtd, dragging the banks stock down by at


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The country's largest bank, State Bank oThe country's largest bank, State Bank ofIndia (SBI), has $5 million exposure toIndia (SBI), has $5 million exposure toLehman Brothers against its global balanceLehman Brothers against its global balance

sheet ofsheet of

$250 billion.$250 billion.


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THANK YOU!THANK YOU!

global financial crisis by anil.j

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