全球金融危机(次贷危机成因讲义-英文版).ppt

Click to edit Master title style,Click to edit Master text styles,Second level,Third level,Fourth level,Fifth level,July 2011,Lecture 10:The GFC,*,Click to edit Master title style,Click to edit Master text styles,Second level,Third level,Fourth level,Fifth level,July 2011,Lecture 10:The GFC,*,Click to edit Master title style,July 2011,Lecture 10:The GFC,*,Click to edit Master title style,Click to edit Master text styles,Second level,Third level,Fourth level,Fifth level,July 2011,Lecture 10:The GFC,*,Click to edit Master title style,Click to edit Master text styles,Second level,Third level,Fourth level,Fifth level,July 2011,Lecture 10:The GFC,*,AFF 5230,Lecture 9:The GFC,Dr Banita Bissoondoyal-Bheenick,Room H3.68,Telephone:[phone],Banita.bissoondoyal-bheenickmonash.edu,Dr Banita Bissoonodoyal-Bheenick(Chief Examiner),Building H room 3.68,Email:banita.bissoondoyal-bheenick.monash.edu,Phone:[phone],Lecture 10:The GFC,2,Reading,Essential Reading,Markus K.Brunnermeier,Deciphering the Liquidity and Credit Crunch 20072008,Journal of Economic PerspectivesVolume 23,Number 1Winter 2009Pages 77100,Recommended reading,Crotty,J.,Structural causes of the global financial crisis:a critical assessment of the new financial architecture,2009,Cambridge Journal of Economics,33,563580,cje.oxfordjournals.org/content/33/4/563.full.pdf+html,Brown,CA&Davis,K*(2008).The sub-prime crisis down under.,Journal of Applied Finance:theory,practice,education,18,(1),16-28.Florida,USA:Financial Management Association International,Lecture 10:The GFC,3,Overview,The Build up to the GFC,What happened in the US that led to the Subprime crisis,What are the causes and catalyst of the GFC,Risk manifested in the GFC,Spillover to Australia,Spillover to other market-Europe(next lecture),Lessons drawn from the GFCdiscussed in the workshop),Lecture 10:The GFC,4,The build-up to the GFC,The housing bubble in the US had its origins in the low interest rate environment which arose as a result of large capital inflows and because of Federal Reserve Policy(blamed on Greenspan),The originate-to-distribute model had replaced the traditional banking model and mortgage originators did not care about the risk because they had no skin-in-the-game,“The growth in the subprime industry grew because of the securitisations on Wall Street.Loans were just sold in droves to Wall Street.There was a huge demand for the product.because of the returns:,Lecture 10:The GFC,5,6,U.S.Real Estate Prices,1987 to 2008:,S&P/Case-Shiller Composite-10 Index,Source:,www.econ.yale.edu/shiller/data.htm,Lecture 10:The GFC,7,What happened,Starting in 2000,mortgage originators in the US relaxed their lending standards and created large numbers of subprime first mortgages.,This,combined with very low interest rates,increased the demand for real estate and prices rose.,To continue to attract first time buyers and keep prices increasing they relaxed lending standards further,Features of the market:100%mortgages,ARMs,teaser rates,NINJAs,liar loans,non-recourse borrowing,Lecture 10:The GFC,8,What happened.,Mortgages were packaged in financial products and sold to investors,Banks and governments found it profitable to invest in the AAA rated tranches because the promised return was significantly higher than the cost of funds and capital requirements were low,In 2007 the bubble burst.Some borrowers could not afford their payments when the teaser rates ended.Others had negative equity and recognized that it was optimal for them to exercise their put options.,U.S.real estate prices fell and products,created from the mortgages,that were previously thought to be safe began to be viewed as risky,There was a“flight to quality”and credit spreads increased to very high levels,Lecture 10:The GFC,Risks manifested in GFC,Credit risk arising from sub-prime borrowers Ninja Loans(no jobs,no income or assets),This risk had been passed on through various structures in the market(facilitated by the rating agencies ratings of AAA on the top tranches),Risk from High leverage in the financial markets exacerbated the shock when it arrived,Liquidity Risk global wholesale capital markets(short term paper,CDOs,asset-backed commercial paper)froze-Impossible to rollover the USCP.,Concentration risk:According to Basel II,A risk concentration is any single exposure or group of exposures with the potential to produce losses large enough(relative to a banks capital,total assets,or overall risk level)to threaten a banks health or ability to maintain its core operations.,“Concentrations are arguably the single most important cause of major problems in banks.”,Lecture 10:The GFC,9,10,Manifestation of Concentration Risk in GFC,Lehman,MBS and commercial real estate,Northern Rock,Concentration in funding from the wholesale market,Wachovia,Concentration in California real estate(acquisition of Golden West Bank),AIG,Concentrations in CDS,Lecture 10:The GFC,GFC the main causes,The growth of inequality,:(Income and wealth),which has consequences:,for the wealthy it produced a large and expanding volume of funds that sought the most profitable investment opportunities,with declining real incomes and standards of living,many workers found it necessary to borrow money against their houses in order to maintain their standards of living;,Chairman of the US Federal Deposit Insurance Corporation,75 percent of subprime mortgage loans turned out to be for people who were refinancing their mortgages,Lecture 10:The GFC,11,GFC the main causes,The Development and use of new financial instruments,Banks and mortgage brokers,found they could generate additional fees by securitising mortgages,mortgage backed securities(MBSs)and collateralised debt obligations(CDOs)were developped-Despite their exotic names,they are essentially debt obligations and are complex and opaque.,Transacted over the counter and they were backed by Rating agencies and investors could cover themselves by buying CDS.,Speculators were betting that the companies will default and this further destabilised the market.,investor demand for high yield mortgage products and the large fee income generated by them led banks and mortgage brokers to sell mortgage to people who could not afford them in the so called subprime mortgage market.-NINJA LOANS,Lecture 10:The GFC,12,GFC the main causes,Low interest rates,cheap loans and the rising leverage of investments,US Federal Reserve cut short term interest rates in late 2000 in order to stimulate the economy.,For bankers the money was free(negative interest rates real rates adjusted for inflation),When money is free,and lending is costless and riskless,the rational lender will keep lending until there is no one else to lend to,The large investment banks increased their asset-to-equity(or leverage)ratios from twenty-three in,2004 to thirty by 2007,This was the case of Bear Stearns,Morgan Stanley,Leverage makes banks,institutions and individuals less resilient to downturns.,Lecture 10:The GFC,13,GFC the main causes,Light or Absent Government Regulation of the financial sector.,Main Aspect:,Deregulation of financial activity,T,he repeal of the Glass Steagall Act-Banks were again free to make risky investments.These risky investments included the complex derivatives,such as mortgage backed securities and collateralised debt obligations,that even experts had trouble understanding and pricing,The lack of regulation of parts of the financial sector,Parts of the financial sector were also unregulated or had,at best,minimal regulation.There was virtually no regulation ofthe so-called shadow banking system:,the powerful non-bank financial institutions,such as bank-created special investment vehicles,private equity funds and hedge funds,Lecture 10:The GFC,14,GFC the main causes,Light or Absent Government Regulation of the financial sector.,Main Aspect:,Regulatory Failures,Regulatory officials,including the Federal Reserve Chairman,Alan Greenspan,failed to properly supervise the banks,understand the poor risk management practices of private lenders,take action against predatory lending practices on high-interest payday loans and subprime mortgages,and failed to act on warnings of financial and economic danger ahead.,Lecture 10:The GFC,15,GFC the main causes Rating Agencies,The credit ratings agencies,such as Moodys,Standard and Poors and Fitch Ratings,rely on simulation models to gauge the risks of these instruments and their tranches.,The credit ratings agencies are also paid by the investment banks to rate their products.This means there is a financial incentive for the agencies to give favourable ratings because their profits depend on keeping the banks happy,A Securities and Exchange Commission(2008:17-18)investigation of the credit ratings agencies in 2007 discovered that they did not even check or verify any of the loan data at the basis of the financial products they were rating.,As they worked to increase the size of the CDO market,and their own profits,one analytical manager at a ratings agency in 2006 wrote to a colleague,Lets hope we are all wealthy and retired by the time this house of cards falters(Securities and Exchange Commission,report),Lecture 10:The GFC,16,Brunnermeier,Securitization and rise in popularity of structured products,Resulted in cheap credit and a housing boom,Growth in repo market(shadow banking),Asset backed commercial paper market froze in July 2007,Credit spreads widened,Interbank market froze on August 9 2007,Fed reserve intervened(dropped discount rate,widened collateral),Monoline insurers downgrade threatened in early 2008,Fannie Mae and Freddie Mac were guaranteed in July 2008,Lehman Bros,Merrill Lynch and AIG,Washington Mutual,Wachovia and Citibank,Lecture 10:The GFC,17,Brunnermeier,“The overall stock market fell off a cliff,losing about$8 trillion in the year after October 2007”,Wall St to Main Stcredit tightened,bailout plan,unemployment,increase in bankruptcies,Shocks get amplified in a full-blown financial crisis,Nobody had focused much on liquidity,but liquidity dries up in a crisis,FIs relying on rolling over short term funding,Loss spiral and margin spiral(also haircuts),Runs on FIs,An increase in counterparty credit risk can create additional funding needs and potential systemic risk,Advocates CCCPs argues that multilateral netting arrangements can stabilize the system,Lecture 10:The GFC,18,19,Australia?,Lecture 10:The GFC,Evolution of the Crisis in Australia,The pre-GFC structure of the Australian financial system suggests that Australia had significant potential exposure to the GFC.,First,Australia was ranked as the second largest(outside the US)issuer of asset backed securities.,Second,the funds management sector(driven by compulsory private pension contribution arrangements)was the fourth largest in the world,Third,Australia had the largest(albeit still relatively small)hedge fund sector in Asia with no special regulation of hedge funds.,Fourth,while the domestic corporate bond and commercialpaper markets (excluding securitization)were relatively small,large Australian companies were active issuers in international bond markets.,Lecture 10:The GFC,20,Evolution of the Crisis in Australia,Fifth,the highly concentrated Australian banking sector,where the biggest four banks had a market share of Australian resident assets of 65%,had only around 40-50%of those assets funded by domestic deposits,relying instead heavily on offshore wholesale funding.,In addition house prices had more than doubled in real terms since the mid 1990s with housing affordability at its lowest level since the late 1980s.,Lecture 10:The GFC,21,22,How it Got Here,The Australian equity market fell in January 2008 by 11 percent,and by the end of April 2008 was some 17.5 percent below its November 2007 peak.,The collapse of the Australian equity market has triggered substantial disruption in the economy and has had a profound effect on companies,banks stockbrokers and individual investors,The specific reasons behind the share price falls for the listed companies are somewhat different,-however common elements are high leverage with large short-term borrowings,predominantly long-term illiquid investments,and complex financial structures including intra-conglomerate equity cross-holdings and debts.,Lecture 10:The GFC,How it Got Here,A number of large non-bank listed finance/investment companies with highly leveraged structures(including Centro Property,MFS,Allco Finance Group and City Pacific)suffered catastrophic share price falls of between 50 and 90 percent from August 2007 to February 2008,Short selling,margin lending,securities lending practices,and financial advisory practices all came under scrutiny in the prolonged bear market,and exposed regulatory weaknesses.,Tricom Securities caused considerable stock market disruption when it defaulted on settlement in January 2008.,In a number of cases speculation that margin calls on executives and directors would be triggered unleashed a wave of short selling,hastening the demise of companies(such as ABC Learning in February 2008)with unsustainable,highly levered,business models.,How it Got Here,The year 2009 saw a number of further collapses of highly levered finance/investment companies.Global investment and advisory firm Babcock and Brown failed in March 2009.Two large companies,Timbercorp and Great Southern which accounted for around 60 percent of the market in agribusiness managed investment schemes failed in April and May 2009 respectively,Another area severely affected by the GFC has been the mortgage/property trust(managed funds)industry.,The other sector badly hit has been the superannuation (pension fund)sector.Compulsory superannuation saw funds undermanagement reach$1.2 trillion before the crisis.At December 2008 this figure had dropped to$1.05 trillion,reflecting falling asset prices.,Lecture 10:The GFC,24,The“Lucky”Country?,Why has Australia been less affected by the crisis than most other developed countries.,Luck,good management,and regulation have all had a role to play.,Lecture 10:The GFC,25,Policy Responses and Implications,1.The first is Reserve Bank and Government actions to unfreeze and restore liquidity to financial markets,Relatively early in the crisis,the Reserve Bank expanded the range of securities it would accept as collateral for repurchase agreements to include private sector securities such as residential mortgage backed securities(RMBS).,In late September 2008,the Federal Government introduced a RMBS purchase agency within the Australian Office of Financial Management with the objective of government purchases of RMBS“restarting”the frozen RMBS market.,Lecture 10:The GFC,26Policy Responses and Implications,2.Actions designed to shore-up confidence in the strength and stability of the financial system,particularly the banking sector.,Most notable here was the government announcement on October 12,2008 of a blanket guarantee of all bank deposits and debt,3.,R,esponse h