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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 l.jpg

The Credit Crunch and its Consequences

Howard DaviesDirector, LSE

Moscow

17th November 2008



Case schiller home price index 2000 2008 l.jpg
Case-Schiller Home Price Index 2000-2008

Source: Wikipedia


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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


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Recent ABX BBB Price History

Price

Source: Markit Partners


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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%




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Act Three: Unravelling

  • Bear Stearns, Indymac, Wa mu

  • HBOS, RBS

  • Fortis, Dexia etc.




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The Credit Crisis: A Five-Act Tragedy

Act One: Subprime

Act Two: Liquidity

Act Three: Unravelling

Act Four: Meltdown

Act Five: Pumping




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Five Ways

  • Legitimacy – why Luxembourg and not China?


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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


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Five Ways

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


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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


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Five Ways

3. Speed: Basel 2 took a decade


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Five Ways

4. Stronger links between macroeconomic surveillance and regulation

  • A new G (G12)

  • Standing group of Finance Ministers


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Five Ways

5. Political leadership


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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


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

Dan Quayle


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The Credit Crunch and its Consequences deposit enough money to cover the losses due to mismanagement”.

Howard DaviesDirector, LSE

Moscow

17th November 2008


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