Description
We have just experienced the worst financial crash the world has seen since the Great Depression of the 1930s. While real economies in general did not crash as they did in the 1930s, the financial parts of the economy certainly did, or, at least, came very close to doing so. Hundreds of banks in the United States and Europe have been closed by their supervisory authorities, forcibly merged with stronger partners, nationalized or recapitalized with the tax payers' money. Banks and insurance companies had, by mid 2010, already written off some 2000 billion dollars in credit write-downs on loans and securities. In this book, Johan Lybeck draws on his experience as both an academic economist and a professional banker to present a detailed yet non-technical analysis of the crash. He describes how the crisis began in early 2007, explains why it happened and shows how it compares to earlier financial crises.
Chapter
Appendix 2.1 Chronology of events: January 2007–June 2011
3: Could today’s financial crisis have been foreseen?
Can financial crises be predicted?
What are “systemic risk” and “systemic crisis”?
What empirical conclusions can we draw from these theories?
4: The US housing market and the subprime crisis
Speculation and bubbles are eternal, only the object varies
A highly profitable sector paid absurdly high salaries and bonuses
The US and European housing markets and corresponding mortgages
Subprime and Alt-A (self-cert) loans
Delinquency and foreclosures
Changing the banking landscape
5: Securitization and derivatives spread the crisis around the world
Ginnie Mae, Fannie Mae and Freddie Mac
Credit derivatives such as credit default swaps
Consequences of the financial crisis for the world’s major banks
Appendix 5.1 Inherent conflicts of interest in subprime securitization
Appendix 5.2 Write-downs in banks and insurance companies, 2007–2009
6: Liquidity risk aspects of the crisis and a comparison with 1907 and 1929
Greenspan’s Fed and bubbles
“Bank runs” and deposit insurance
What to do when deposit insurance is not enough
Appendix 6.1 The liquidity-risk framework proposed by the
FSA and the BIS
7: Credit risk aspects of the crisis, rating and solvency
Rating companies and the supervision of credit risks
Should (or could) banks in crisis be nationalized?
Solvency ratios in the major banks prior to the crisis
Why were the solvency ratios in Basel I and II inadequate in the crisis?
Does the principle of mark-to-market lead to procyclicality?
Appendix 7.1 Government support activities for banks’ capital ratios, 2007–2010
Actions taken by the Benelux countries
Summary for the EU countries
Appendix 7.2 The proposed new capital requirements under Basel III
The quality and quantity of the capital base is to be raised and become more transparent
The risk coverage is to be increased, in particular as concerns the counter-party credit risk
In order to simplify international comparisons across regulatory systems and to set an overall limit on banks’ risk-taking, an overall leverage ratio (Tier 1 capital/total assets) will be introduced
The tendency to procyclicality will be addressed by the creation of counter-cyclical buffers (“forward-looking provisioning”)
8: Financial crises in modern history: similarities and differences
The Asian crisis, 1997–1999
The Russian financial and economic crisis of 1998
The US “savings and loan” (thrift) crisis, 1980–1994
The Nordic financial crises, 1987–1995
Summary and a comparison with today’s crisis
9: Worldwide changes in regulation and supervision as a result of the crisis
How should authorities react in an acute crisis?
Banks too big to fail have become even bigger!
Do scale economies justify big banks?
How to limit the size of banks too big to fail
Will bank taxes and financial stability funds alleviate the next crisis?
How should hedge funds be supervised?
Host- or home-country control?
How will supervision be organized and coordinated in the USA in the future?
How will the consumer be protected?
Major recommendations in this book and their fulfillment to date
Banks, capital and deposit insurance
Regulation and supervision
Appendix 9.1 List of regulatory authorities in the USA
Appendix 9.2 Overview of bank taxes in different countries
Hedge funds and private equity funds
The government-sponsored enterprises Fannie Mae and Freddie Mac
Will the FSOC and the ESRB spot systemic risk more quickly?
Housing and the mortgage market
Where will the next crisis be?
The Economist, various issues from July 2007
Financial Times, various issues from August 2007
A Global History of the Financial Crash of 2007–10
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