Should central banks always throw rescue rafts to failing banks?

Agenda

• 1. Genesis of ”Financial crisis of 2007-2010”• 2. How central banks helped failing banks?

A) In the USB) In Europe

• 3. Should central banks help failing banks in the future?

• 4. Questions!

Genesis of ”Financial crisis of 2007-2010” (1)

1. Banks doing everything to maximalize their profits – huge bonuses for managers;

2. 1999 – Bill Clinton repealed part of Glass-Steagall Act (1933) – reduced separation between commercial and investment banks;

3. More credits for people with lower income (including subprime mortgage) ;

4. Lowering interest rates levels by FED, in 2002 reached 2%, including inflation rate, they were negative;

Genesis of ”Financial crisis of 2007-2010” (2)

5. Best investment strategy: take mortgage, pay instalments with money gained on selling property;

6. Mortgages as a security for „Collateralized debt obligations (CDO)” – risky financial instruments, used for speculation. Banks also used big leverages;

7. FED raised interest rates to 5%, what changed situation and mortgages weren’t that attractive any more;

8. Many people stopped to pay their mortgage, as they couldn’t afford them;

Genesis of ”Financial crisis of 2007-2010” (3)

9. Banks siezed properties and started to sell them – prices of properties dropped;

10. In the middle of 2007, subprime mortgages proved to be without cover…

Impact on financial markets

• The International Monetary Fund estimated that large U.S. and European banks lost more than $1 trillion on toxic assets and from bad loans from January 2007 to September 2009. These losses are expected to top $2.8 trillion from 2007-10. U.S. banks losses were forecast to hit $1 trillion and European bank losses will reach $1.6 trillion

Crisis’ victims in the US

• Bear Stearns• Fannie Mae & Freddie Mac• Merril Lynch• Goldman Sachs• Lehman Brothers• Washington Mutual• American International Group• Wachovia

How central banks helped failing banks in the US? ”Paulson proposal”

• The proposal called for the federal government to buy up to US$700 billion of illiquid mortgage-backed securities with the intent to increase the liquidity of the secondary mortgage markets and reduce potential losses encountered by financial institutions owning the securities. The draft proposal was received favorably by investors in the stock market, but caused the U.S. dollar to fall against gold, the Euro, and petroleum.

„Paulson Plan” summary• Stabilize the economy• Improve liquidity• Comprehensive strategy• Immediate and significant• Broad impact• Investor confidence• Impact on Economy and

GDP

Crisis’ victims in Europe

• HBOS (UK)• Bradford & Bingley (UK)• Fortis (Benelux)• Kaupthing Bank (Iceland)• Anglo-Irish Bank (Ireland)

How central banks helped failing banks in Europe?

• On 26 November 2008, the European Commission proposed a European stimulus plan amounting to 200 billion euros (1,5% of EU GDP) to cope with the effects of the global financial crisis on the economies of the members countries.

• National plans are often close to 1.2 percentage points of GDP and are focused on 2008 and 2009. Germany and Spain have announced fiscal stimulus of respectively 3.3% and 3.7% of their GDP.

How central banks helped failing banks in Europe? (2)

• Germany (2) 82 billion Euros (3,3%)• France 26 billion Euros (1,3%)• Spain 40 billion Euros (3,7%)• Italy 9 billion Euros (0,6%)• Netherlands 8,5 billion Euros (1,4%)• UK £31 billion (2,2%)

Should central banks help failing banks in the future?

Thank You for attention!