cruikshank - distressed financial markets; navigating the shoals of liquidity risk (2008)

[...]...00-DFM-Prelims-cpp:Layout 1 x 21/10/08 16:35 Page x 00-DFM-Prelims-cpp:Layout 1 21/10/08 16:35 Page xi Foreword Foreword The focus of this book is on financial markets, the ways they can become distressed, and the actions that can be taken to at least mitigate the severity of the impact of distress However, the definition of ‘market’ will be applied quite broadly since the signs of distress... in the future The work of the Commission, particularly its Chairman, Senator Nelson Aldrich, led to the famous Jekyll Island meeting of 1910 attended by the country’s principal financiers The discussions held at Jekyll Island focused on monetary policy and the workings of the banking system They paved the way for the creation 4 01-DFM-ch01-cpp:Layout 1 16/10/08 12:05 Page 5 Financial crises and their... Many of the second group, similar also to their counterparts of the past, continue to find themselves economically in harm’s way Irrespective of the era in which widespread financial distress is examined, the existence of cyclicality and oscillating tendencies and the factors which cause them is central to understanding the potential for distress Neither the amplitude of oscillations nor the frequency of. .. intermediaries now play key roles in the issuance and trading of securities and what this means for risk management It examines the role and significance of liquidity, the convergence of some aspects of large financial institutions and certain segments of the securities markets It concludes with an assessment of the determinants of financial market stability xvii 00-DFM-Prelims-cpp:Layout 1 21/10/08 16:35 Page... well as the transmutation of markets for structured finance products, particularly the collateralised debt obligation Despite the progress made in the development of risk management tools, the ability to hedge against sudden illiquidity continues to pose a major challenge The chapter concludes with a summary of best practices in the management of the liquidity risk facing financial institutions The second... extinction And many of them, when certain that their calls were right, exploited those successes to maximum advantage to preserve their reputations as clairvoyants well beyond that which they deserved Members of the other group, the bulk of the populace, who either lacked the capacity or the inclination to take a critical look at events or the willingness to heed those around them who did, found themselves... convergence, will tend to lay on successive trades in the direction of the anticipated convergence If they are large institutional players (and here the notion of what is large is relative to the size of the market in which they are transacting), then the directionality of their successive bets is not without its own influence on the way the market subsequently moves Therefore, market dynamics at any given moment,... to be When the quality of that promise has been badly marred at a systemic level, seeking solutions within the field of finance is likely to be frustrated Rather, the unequivocal focus must be on a matter which transcends finance and that is how to restore trust xix 00-DFM-Prelims-cpp:Layout 1 21/10/08 16:35 Page xx 01-DFM-ch01-cpp:Layout 1 16/10/08 12:05 Page 1 Part 1 The framework 01-DFM-ch01-cpp:Layout... many of the features of the highly liquid and well-organised markets we recognise today For example, the US housing market has on at least two occasions – notably during the S&L crisis of the 1980s and the sub-prime crisis in 2007 – been at the root of abundant financial market distress And although we use the term ‘market’ in connection with housing, clearly transactions in this sector lack many of the. .. for the fear to spill into the real economy as businesses revised their purchasing plans sharply downward The Great Depression, which followed, both expanded its impact to be felt globally and lasted the better part of a full decade Numerous books have been written on the causes of the Great Depression Opposing schools of thought have enumerated the causes of these events Among the theories proffered . alt="" Distressed Financial Markets: Navigating the Shoals of Liquidity Risk 00-DFM-Prelims-cpp:Layout 1 21/10/08 16:35 Page i 00-DFM-Prelims-cpp:Layout 1 21/10/08 16:35 Page ii Distressed Financial. the other group, the bulk of the populace, who either lacked the capacity or the inclin - ation to take a critical look at events or the willingness to heed those around them who did, found themselves. And the concept of liquidity risk addresses those factors which can (or threaten to) impair this ability, irrespective of the solvency or other- wise of the person or entity involved. At the