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

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