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The Credit Crunch and its Consequences

The Credit Crunch and its Consequences. Howard Davies Director, LSE. Moscow 17 th November 2008. Act One: Subprime. Case-Schiller Home Price Index 2000-2008. Source: Wikipedia. Mortgage Origination by Product (%). Notes:

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The Credit Crunch and its Consequences

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  1. The Credit Crunch and its Consequences Howard DaviesDirector, LSE Moscow 17th November 2008

  2. Act One: Subprime

  3. Case-Schiller Home Price Index 2000-2008 Source: Wikipedia

  4. Mortgage Origination by Product (%) • Notes: • Total mortgage origination excludes seconds and home equity lines of credit • For relative growth versus 2001, 2007 annualized based on 9 months of date

  5. Recent ABX BBB Price History Price Source: Markit Partners

  6. Resecuritisation Capital Structure Containing Subprime Loans Subprime Mezzanine CDO Containing BBB Subprime Bonds 100% 100% 11% SUPER SENIOR AAA CUMULATIVE LOSSES 8.6% 40% AAA AA A BBB Equity 28% 20% 11% 11% 7% 7% 7% 0% 0%

  7. Act Two: Liquidity

  8. Sources: Bloomberg and Bank calculations

  9. Act Three: Unravelling • Bear Stearns, Indymac, Wa mu • HBOS, RBS • Fortis, Dexia etc.

  10. Act Four: Meltdown

  11. Act Five: Pumping

  12. The Credit Crisis: A Five-Act Tragedy Act One: Subprime Act Two: Liquidity Act Three: Unravelling Act Four: Meltdown Act Five: Pumping

  13. EU Growth Rates: IMF Forecasts

  14. Source: www.ft.com

  15. Five Ways • Legitimacy – why Luxembourg and not China?

  16. Global Committee Structure - A Regulator’s View G-7 (Gov’ts) IMF World Bank (Gov’ts) OECD (Gov’ts) WTO FATF (Money Laundering) IASB (Accounting IASC Financial Stability Forum IAASB (Audit) PIOB Monitoring Group Bank for International Settlements (Central Banks) G-10 (Central Banks) Basel (Banking) IOSCO (Securities) IAIS (Insurance) IFIAR (Audit) Source: Adapted with permission from Sloan and Fitzpatrick in Chapter 13, The Structure of International Market Regulation, in Financial Markets and Exchanges Law, Oxford University Press, March 2007 CGFS CPSS Joint Forum

  17. Five Ways 2. Simpler, co-ordinated mechanisms which better reflect the shape of today’s markets

  18. National Regulatory Structures 57 3 Other bank regulators 49 Central Bank 10 35 Central banks as banking regulator No Central Bank interest 7 54 Non-Central Bank 39 28 Central bank as one pillar 2 Source: How Countries Supervise their Banks, Insurers and Securities Markets 2007: Central Bank Publications

  19. Five Ways 3. Speed: Basel 2 took a decade

  20. Five Ways 4. Stronger links between macroeconomic surveillance and regulation • A new G (G12) • Standing group of Finance Ministers

  21. Five Ways 5. Political leadership

  22. Five ways to fix our Financial Architecture • Legitimacy – why Luxembourg and not China? • Simpler, co-ordinated mechanisms which better reflect the shape of today’s markets • Speed: Basel 2 took a decade • Stronger links between macroeconomic surveillance and regulation • Political leadership

  23. “ Bank failures are caused by depositors who don’t deposit enough money to cover the losses due to mismanagement”. Dan Quayle

  24. The Credit Crunch and its Consequences Howard DaviesDirector, LSE Moscow 17th November 2008

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