208 Pages

An Anatomy of the Financial Crisis


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A clear synthesis and original analysis of the various factors that led to the financial crisis of 2007-2010.

How did the US financial crisis snowball into USD 15 trillion global losses? This book offers a clear synthesis and original analysis of the various factors that led to the financial crisis of 2007-2010 - namely, an asset price bubble and excessive leverage. The focus is on the ingredients of and dynamics within the international financial system, and as such is the most comprehensive publication in scope to date in terms of market, country and instrument coverage. In addition to its thorough dissection of the causes and consequences of the most calamitous financial crisis in the past seventy years, the author also debates 'the way forward', including regulatory challenges, proposed changes and critique, and early warning systems.

The objective of this reader is to provide a holistic summary of the financial crisis, and bring to light a new perspective on each of the issues, while simultaneously providing a thorough platform for those wishing to research any of the sub-topics independently. It ultimately discusses the lessons to be learned from the recent crisis, and questions whether the global financial system is capable of learning them. Written in a clear explanatory prose and featuring a wealth of quantitative data and qualitative analysis, this reader is accessible to the beginner, intermediate and advanced student.

Preface; Chapter One: The Crisis and the Too Big to FRAME Problem, the BIG Picture First; Chapter Two: Evolution of the Structure of the Global Financial System Pre-Crisis & Systemic Hot Spots; Chapter Three: Crisis Unravelling & Key Events; Chapter Four: Systemic and Institutional Crisis Cost ; Chapter Five: Regulatory Regimes & Response to the Crisis; Chapter Six: Macroprudential Analysis and Early Warning Systems (EWS) for Fragility & Crises; Chapter Seven: Regulatory Tumbleweed or is it Tangleweed? Appendix 1: Current Crisis Time Log Across the Globe; Appendix 2: A Brief History of Crises in the Past; Appendix 3: References



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Published 01 August 2010
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EAN13 9780857286680
Language English
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An Anatomy of
the Financial Crisis
An Anatomy of the Financial Crisis
Blowing Tumbleweed
When institutions are too big to FRAME! What lessons can we learn and are we capable of learning them?
Nashwa Saleh, CFA
Anthem Press An imprint of Wimbledon Publishing Company www.anthempress.com
This edition first published in UK and USA 2010 by ANTHEM PRESS 75-76 Blackfriars Road, London SE1 8HA, UK or PO Box 9779, London SW19 7ZG, UK and 244 Madison Ave. #116, New York, NY 10016, USA
Copyright © Nashwa Saleh 2010
The author asserts the moral right to be identified as the author of this work.
All rights reserved. Without limiting the rights under copyright reserved above, no part of this publication may be reproduced, stored or introduced into a retrieval system, or transmitted, in any form or by any means (electronic, mechanical, photocopying, recording or otherwise), without the prior written permission of both the copyright owner and the above publisher of this book.
British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library.
Library of Congress Cataloging in Publication Data A catalog record for this book has been requested.
ISBN-13: 978 0 85728 961 2 (Pbk) ISBN-10: 0 85728 961 6 (Pbk)
ISBN-13: 978 0 85728 992 6 (eBook) ISBN-10: 0 85728 992 6 (eBook)
List of Figures Acknowledgements and Disclaimer Preface Acronyms
Chapter 1. The Crisis and the Too Big to FRAME Problem: The BIG Picture First 1.1 The Evolution of the Global Financial Sector Structure Pre-Crisis and Systemic Hot Spots 1.2 Weak Capitalization, Excessive Leverage and Skewed Funding Structures 1.3 Global Imbalances: Systemic Significance of the US Too High 1.4 Crisis Unravelling, Key Events and Turning Points 1.5 Systemic and Institutional Crisis Cost 1.6 Outlook for Write-Downs, Provisioning, Capital Raisings and Refinancing Needs 1.7 Outlook for the Real Economy 1.8 Regulatory Regimes and Response to the Crisis 1.9The Ballooning Fiscal Overhang as a Consequence of Necessary Policy Action 1.10 Regulatory Challenges, Proposed Changes and Critique 1.11 Banking Sectors and Individual Institutions are Too Big to: Fail, Regulate, Audit, Manage and Evaluate, in Short Literally Too Big to FRAME 1.12 Selected Proposed Regulatory Changes 1.13 The Way Forward, Macroprudential Analysis and Early Warning Systems for Fragility and Crises 1.14 Regulatory Tumbleweed or is it Tangleweed? A Critique of Proposed Changes
ix xi xiii xv
4 4 6
7 7 10
12 12
12 13
Chapter 2. Evolution of the Structure of the Global Financial System PreCrisis and Systemic Hot Spots 2.1 Capital Markets 2.2 Agents 2.3 Systemic Hot Spots
Chapter 3. Crisis Unravelling and Key Events 3.1 Imbalance Build-Up in the US Economy (2001–07) 3.2 US Sub-Prime Crisis (2006–07 and Beyond) 3.3 US Bank and NBFI Failures and Confidence Crisis (September 2008 and Beyond) 3.4 Global Bank and NBFI Failures (January 2008 and Beyond) 3.5 Impact on Global Real Macro-Performance (2008 and Beyond)
Chapter 4. Systemic and Institutional Cost of the 2007–10 Crisis 4.1 Definition of Systemic Financial Crises 4.2 Output Costs 4.3 Agent Losses 4.4 Crisis Outlook
Chapter 5. Regulatory Regimes and Response to the Crisis 5.1 Existing Regulatory Regimes Pre-Crisis 5.2 Losses by Type of Regulatory Regime 5.3 Policy Response 5.4 Regulatory Challenges and Proposed Changes 5.5 Selected Proposed Changes to Regulatory Bodies and to Banking Regulations 5.6 Selected Proposed Changes to Regulation
Chapter 6. The Way Forward, Macroprudential Analysis and Early Warning Systems for Fragility and Crises 6.1 General Conceptual Design and Elements of a Robust and Applicable EWS 6.2 History of EWS Design 6.3 Performance of these Models: Did they Predict the Crisis?
19 20 27 38
47 48 50
51 52 56
61 61 62 64 71
87 88 88 90 96
99 101
105 106 108
Chapter 7. Regulatory Tumbleweed or is it Tangleweed? 7.1 EWS Implications for Regulation 7.2 Critique of Proposed Changes 7.3 Blowing Tumbleweed or is it Tangleweed? Focal Points to Address
Appendix 1. Current Crisis Time Log Across the Globe Appendix 2. A Brief History of Crises in the Past References Index
113 113 120
125 167 171 179
Chapter 2 Figure 2.1 Systemic Hot Spots in Global Market Structure and Market Performance Figure 2.2 Credit Market Structure and Proportion of Securitization Figure 2.3 European Securitization Markets and ABS Investor Composition Figure 2.4 Insurance Market Shares and Product Segmentation 30 Figure 2.5 Pension Fund Assets Evolution in OECD (1995–2007) and Impact of Risk Aversion on Asset Values Figure 2.6 Large Hedge Fund Failures on the Back of the Crisis Figure 2.7 SIVs and their Sponsors in 2007 Figure 2.8 RoE Decomposition 1996 vs 2007 Proforma RoEs for Various Leverage Scenarios Figure 2.9 Increased Reliance on Money Market Funding (1996 vs 2007) Figure 2.10 No Credit-Risk Transfer Figure 2.11 Capital ‘Shortfall’ is Large for Some Banks, No Regulatory Capital Kept for ‘Off-Balance Sheet’
Chapter 3 Figure 3.1 The Evolutionary Development of the Crisis of 2007–10 Figure 3.2 OECD Home Price-to-Income Ratios and Household Indebtedness Relative to Disposable Income Figure 3.3 Bailout Packages in the Eurozone (Euros)
34 37
41 43
49 54
Chapter 4 Figure 4.1
Figure 4.2 Figure 4.3
Figure 4.4
Figure 4.5
Figure 4.6
Figure 4.7
Figure 4.8
Chapter 5 Figure 5.1
Figure 5.2
Figure 5.3
Figure 5.4
Figure 5.5
Chapter 7 Figure 7.1
Figure 7.2
Figure 7.3
Output Losses of Financial Crises as a % of GDP (1980–2002) and in Major Crisis Episodes to Date ‘Iceberg’ of Financial Sector Losses Write-Downs by Major Banks and Market Capitalization of the Global Banking Sector Post-Crisis 66 Write-Downs on Bank Holdings of Loans and Securities and Expected Loss Rates by Region Credit-Risk Transfer within and between Global Zones and the Contagion Cycle Contagion Risk in Emerging Markets and Net Official Flows to Developing Countries (USD Billion) US Ratio of Interbank Lending to Total Bank Reserves (Loan Supply and Loan Multiplier) Key Capital Market Indicators for Selected OECD Countries (2007)
Bank Losses and Losses to Credit Ratios for SIRs vs TP Regulatory Systems Policy Rates and Central Banks Balance Sheet Expansion Headline Support for the Financial Sector and Upfront Financing Need (% of GDP) Crisis Stimulus Packages, Budget Balance, Public Debt and Policy Measures by Large Countries Assets to GDP of Host Country and Selected Banks – Too Big to FRAME?
Policy Tools Used in Crisis Resolution for 33 Systemic Banking Crises and Resulting Cumulative Fiscal Costs – An Evaluation (1977–2002) 115 Tradeoffs between Regulator Objectives and Macroprudential vs Microprudential Analysis Financial System ‘Net Risk’: Regulator Strength and System Fragility
63 65