Factors That Led Up To the Global Banking Crisis 2007/09

This article discusses the macro and micro economic factors that led to the global banking crisis in 2007/09. It explores the causes and stages of the crisis, including excessive lending to the U.S. subprime housing market, securitization of subprime loans, and the collapse of Lehman Brothers.

The Global Banking Crisis 2007/09
Factors That Led Up To the Banking Crisis
 Macro Economic Factors
- Global Financial Imbalances
- Long Periods of Low Real Interest Rates
Factors That Led Up To the Banking Crisis
 Micro Economic Factors
- Consumer Inertia
- High Levels of Corporate Leverage
- Compensation Schemes and Volumetric Targeting
- Rating Agencies
- Risk Measurement Techniques and Regulation
Micro Economic Factors Revisited
Stage 1(Pre-March 2008)
 Excessive lending to the U.S. Sub prime housing market
 Securitisation of sub prime loans via structured finance vehicles (SFVS) and collateralised
debt obligations (CDOs)
 SFVS and CDOS are guaranteed by hedge funds and mono line insurers via credit default
swaps
 U.S Economy moves into recession and house prices fall
 This causes a ripple effect or contagion throughout the global economy
Micro Economic Factors Revisited
Stage 2 (March-Sept 2008)
 Concerns about the U.S. Economy spread to other economies
 Financial institutions come under pressure
 In the U.K. Northern rock is nationalised (Sept 2007)

 In the U.S. Bear sterns taken over by JP Morgan (March 2008)
 Mono line insurers municipal bond insurance association and American Municipal Bond
Assurance Co have their credit rating reduced (June 2008). AMBAC goes bust in 2010.
Micro Economic Factors Revisited
Stage 3 (Sept-Late 2008)
 Lehman Brothers collapses
 Freddie Mac and Fannie Mae bailed out by U.S. Government
 U.K. Government nationalises Bradford and Bingley
 Lloyds TSB takes over HBOS
 Bank of America takes over Merrill Lynch
 Announcement of initiatives to support banks and hedge funds in the U.K. and U.S
 Special Liquidity Scheme
Micro Economic Factors Revisited
Stage 4 (Oct 2008-March 2009)
 Credit Guarantee Scheme
 Bank Discount Window Facility
 The Enterprise Finance Guarantee
 Asset Purchase Plan
 Quantitative Easing
Micro Economic Factors Revisited
Stage 5 (The Euro Zone Crisis)
Concerns about the Overall deficits and Budget deficits of Southern Ireland, Greece, Italy and Spain.
 ECBs Overnight Deposit Facility
 Long Term Refinancing Operation
Stages of the Crisis
Stages of the crisis Markets and institutions
Industrial economies Emerging mar
Macroeconomic
conditions Policy responses Macroeconomi
conditions

1.
Pre-March 2008:
prelude to the crisis
Subprime mortgage defaults
create widespread financial
stress.. Uncertainty about
size and distribution of
losses. Crisis starts when
inter bank markets are
disrupted in August 2007;
waves of increasing intensity
until March 2008.
Growth weakens.
Central bank (CB) rate
cuts. Liquidity
operations targeted at
money markets.
Robust growth
inflation rising.
inflation targete
their targets.
Mid-March to mid-
September 2008:
towards the
Lehman bankruptcy
Takeover of Bear Stearns in
March slows decline, but
bank losses and writedowns
accumulate as downturn
weighs on asset prices.
More countries affected.
Liquidity crisis reveals
underlying solvency crisis,
increasing pressure on
financial institutions.
G3 economies contract
even as oil prices fall
steeply after August.
Initially further rate cuts.
Liquidity facilities grow.
GSEs put into
conservatorship in early
September.
GDP growth slo
June but remai
positive. Expo
weaken in cent
Europe.
Stages of the
crisis
Markets and
institutions
Industrial economies Emerg
Macroeconomic
conditions
Policy
responses
Macro
conditi
1.
Pre-March
2008:
prelude to
the crisis
Subprime mortgage
defaults create
widespread financial
stress.. Uncertainty
about size and
distribution of
losses. Crisis starts
when inter bank
markets are
disrupted in August
2007; waves of
increasing intensity
until March 2008.
Growth
weakens.
Central bank
(CB) rate cuts.
Liquidity
operations
targeted at
money
markets.
Robus
with in
rising.
inflatio
target
their t
Mid-March
to mid-
September
2008:
towards the
Lehman
bankruptcy
Takeover of Bear
Stearns in March
slows decline, but
bank losses and
writedowns
accumulate as
downturn weighs on
asset prices. More
countries affected.
G3 economies
contract even
as oil prices fall
steeply after
August.
Initially further
rate cuts.
Liquidity
facilities grow.
GSEs put into
conservatorshi
p in early
September.
GDP g
slows
but re
positiv
Export
in cen
Europ

Liquidity crisis
reveals underlying
solvency crisis,
increasing pressure
on financial
institutions.