global financial crisis

The Subprime Crisis / Global Financial Crisis / Great Recession April 2015 Dr. Loeffler and Dr. Wonil Lee CAU MBA The Global Financial Crisis Tale 1 Page 2 The Global Financial Crisis (GFC) according to Wikepedia • The financial crisis of 2007–2009, also known as the Global Financial Crisis and 2008 financial crisis, • is considered by many economists the worst financial crisis since the Great Depression of the 1930s. • It resulted in the threat of total collapse of large financial institutions, the bailout of banks by national governments, • and downturns in stock markets around the world. • In many areas, the housing market also suffered, resulting in evictions, foreclosures and prolonged unemployment. • The crisis played a significant role in the failure of key businesses, declines in consumer wealth estimated in trillions of U.S. dollars, and a downturn in economic activity leading to the 2008–2012 global recession and contributing to the European sovereign-debt crisis. • The active phase of the crisis, which manifested as a liquidity crisis, can be dated from August 9, 2007, when BNP Paribas terminated withdrawals from three hedge funds citing "a complete evaporation of liquidity". Page 3 The Great Recession: US Unemployment Page 4 The Great Recession: GDP growth Q4/2008 Page 5 Here comes the „The Subprime“ • The bursting of the U.S. housing bubble, which peaked in 2006, caused the values of securities tied to U.S. real estate pricing to plummet, damaging financial institutions globally. • The financial crisis was triggered by a complex interplay of policies • that encouraged home ownership, providing easier access to loans for subprime borrowers, • overvaluation of bundled sub-prime mortgages based on the theory that housing prices would continue to escalate, • questionable trading practices on behalf of both buyers and sellers, • compensation structures that prioritize short-term deal flow over long- term value creation, moral hazard • and a lack of adequate capital holdings from banks and insurance companies to back the financial commitments they were making. Page 6 And, the solution was • Questions regarding bank solvency, declines in credit availability and damaged investor confidence had an impact on global stock markets, where securities suffered large losses during 2008 and early 2009. • Economies worldwide slowed during this period, as credit tightened and international trade declined. • Governments and central banks responded with • unprecedented fiscal stimulus, • monetary policy expansion • and institutional bailouts. • In the U.S., Congress passed the American Recovery and Reinvestment Act of 2009. • In the EU, the UK responded with austerity measures of spending cuts and tax increases without export growth. [13] Page 7 From a historical perspective the GFC (2007-09)  was nothing special  it basically was a severe, and widespread, banking crisis (even so the so called shadow banking played a major role)  Because of large scale central bank and government intervention a systemic financial crisis resulting in a total meltdown of the financial system and subsequently the real economy could be prevented  The world economy was closer to the abyss than ever before the 1930s  Strange things happened … Page 8 Strange things happened Bank Run in the UK Past and Present (2007) Page 9 Banks runs/panics and systemic banking crisis • A bank run (also known as a run on the bank) occurs when a large number of customers withdraw their deposits from a financial institution and either demand cash or transfer those funds into government bonds or a safer institution because they believe that financial institution is, or might become, insolvent. • As a bank run progresses, it generates its own momentum, in a kind of self-fulfilling prophecy (or positive feedback loop) – as more people withdraw their deposits, the likelihood of default increases, thus triggering further withdrawals. This can destabilize the bank to the point where it runs out of cash and thus faces sudden bankruptcy. • A banking panic or bank panic is a financial crisis that occurs when many banks suffer runs at the same time, as people suddenly try to convert their threatened deposits into cash or try to get out of their domestic banking system altogether. • A systemic banking crisis is one where all or almost all of the banking capital in a country is wiped out. [...]... Ben Bernanke, Fed Chairman: “I honestly believe that September and October of 2008 was the worst financial crisis in global history, including the Great Depression.” Almost all investment banks were at risk ”Even Goldman Sachs, we thought there was a real chance that they would go under.” Page 15 Financial crisis are inherent features of credit based market economies as economic cycles are All that is... Spain and Ireland • The euro crisis has in this respect been a continuation of the financial crisis by other means, as markets have agonised over the weaknesses of European banks loaded with bad debts following property busts The Economist, Sep 7th 2013 Page 21 It‘s debt, stupid • It was the growing rate of default on home mortgages in America that precipitated the financial crisis five years ago • These...  From 2004-07, the top five U.S investment banks each significantly increased their financial leverage, which increased their vulnerability to a financial shock These five institutions reported over $4.1 trillion in debt for fiscal year 2007, about 30% of USA nominal GDP for 2007 As a consequence of the financial crisis  Lehman Brothers was liquidated  Bear Stearns and Merrill Lynch were sold at... / Benefits of Debt / Financial Intermediation (FI)  Financial intermediation facilitates the matching of savings and investments in an economy by channeling funds from surplus to deficit units  FI lowers the transaction and agency costs in financial markets  This results in a lower cost of capital > larger and more efficient investments > higher economic growth and welfare  Financial Interrelations... efficient investments > higher economic growth and welfare  Financial Interrelations Ratio = quotient of financial and tangible assets (like land, buildings etc.)  Ratio of unity is characteristic of financial maturity of a country  Financial institutions typically hold between a quarter and a half of all financial assets Page 35 ... widespread and an integral feature of human / societal nature) Page 16 Financial crisis are inherent features of credit based market economies as economic cycles are Korea Times, Sep 25, 2013 Page 17 The GFC is no evidence that capitalism or the market economy has failed • Empirical research shows that countries with a higher frequency of financial/ economic crises tend to have higher economic growth • Despite... market cap reached 5.8tn won while Tong Yang was only 500bn won 4,000 3,000 2,000 1,000 0 자료 : DataGuide 11 Strange things happened or rather were uncovered because of the crisis Page 12 Strange things happened  Global economic crisis spurred 5,000 additional suicides [in 2009], study says (Los Angeles Times September 18, 2013)  Shortly before 5pm on Monday night, Adolf Merckle [74] quietly put on... Baden-Württemberg late last year for temporary financial backing but was turned down (Europe Business News 07 Jan 2009) Page 14 „it‘s all about liquidity“ The “NORMAL” • Liquidity is abundant, credit is available • Economic fundamentals are strong and are getting better • The prevailing mood is optimism and trust in the economic future and in business and financial counterparts The CRISIS • “rapidly changing opinions”... Securities was unable to offer any convincing plan for the group's liquidity crisis, it is facing a major run on its deposits by skittish investors Although the company and the Financial Supervisory Service persuaded on September 24 the investors that their money will be safe, it was not enough to talk them into going home According to the financial regulator, the amount of money withdrawn on the whole days... economy, no mean reversion and no equilibrium • This inherent instability is greatly magnified by credit / leverage • Proper financial regulation and policy making can limit the frequency and extent of financial crises, but will never be able to root them out completely Blaming financial and economic crises on the “irrational”(behavioral economics) or unethical (“greed”) behavior of economic agents is . Crisis (GFC) according to Wikepedia • The financial crisis of 2007–2009, also known as the Global Financial Crisis and 2008 financial crisis, • is considered by many economists the worst financial. Subprime Crisis / Global Financial Crisis / Great Recession April 2015 Dr. Loeffler and Dr. Wonil Lee CAU MBA The Global Financial Crisis Tale 1 Page 2 The Global Financial. recession and contributing to the European sovereign-debt crisis. • The active phase of the crisis, which manifested as a liquidity crisis, can be dated from August 9, 2007, when BNP Paribas