Overview
Chart 1 Asset prices during the recent market
turbulence
Sources: Halifax, IPD, JPMorgan Chase & Co., Merrill Lynch, Thomson Datastream and Bank calculations.
(a) Series inverted.
(b) Sub-prime series is the A-rated 2006 H2 vintage ABX.HE index.
(c) Dotted line shows start of July 2007.
Chart 2 Financial market liquidity(a)
Sources: Bank of England, Bloomberg, Chicago Board Options Exchange, Debt Management Office, London Stock Exchange, Merrill
Lynch, Thomson Datastream and Bank calculations.
(a) The liquidity index shows the number of standard deviations from the mean. It is a simple unweighted average of nine liquidity
measures, normalised on the period 1999–2004. The series shown is an exponentially weighted moving average. The indicator is more
reliable after 1997 as it is based on a greater number of underlying measures.
Chart 3 Global issuance of asset-backed securities(a)
Source: Dealogic.
(a) Quarterly issuance. ‘Other’ includes auto, credit card and student loan ABS.
(b) Commercial mortgage-backed securities.
(c) Residential mortgage-backed securities.
Chart 4 Market-implied expectations of ultimate loss rates
on US sub-prime mortgages (a)(b)
Source: Bank calculations using data from JPMorgan Chase & Co.
(a) Based on the collateralised debt obligation (CDO) model used in ‘A simple CDO valuation model’, Bank of England Financial
Stability Review, Box 1, December 2005, pages 105–06, applied to 2007 H1 ABX tranches, assuming these prices reflect only
credit risk.
(b) The model estimates a market-implied probability of default of the underlying mortgages. This is a ‘risk-neutral’ default
probability. In the likely case that investors are averse to risk, the perceived probability of default will be lower than under the
risk-neutral measure.
Chart 5 Anomalies in the prices of the ABX subprime index (2007 H1 vintage)(a)(b)
Source: Bank calculations using data from JPMorgan Chase & Co.
(a) The pricing model is an adaptation of that used in ‘A simple CDO valuation model’, Bank of England Financial Stability Review, Box
1, December 2005, pages 105–06.
(b) The loss given default rate on the underlying collateral is uncertain, but is assumed for the purposes of this chart to be 50%.
Table A Major UK banks’ and LCFIs’ structured credit and
monoline-related write-downs and exposures(a)(b)
US$ billions
Major
UK banks
European
LCFIs
US securities US
houses
commercial
banks
2007 H2
2008 Q1
14
–(d)
32
5(d)
39
13
30
17
Of which:
US sub-prime
Other US MBS and ABS(e)1
CMBS(f)
Leveraged loans
Monoline guarantees
11
2
0
1
1
26
4
2
4
3
33
2
1
7
7
33
Remaining exposures(g)
192
232
295
195
Memo item
Total assets
11,215
11,748
4,086
5,579
Total write-downs(c)
1
8
3
Sources: Bank of England, Bloomberg, published accounts and Bank calculations.
(a) Includes write-downs and exposures where information has been disclosed.
(b) Balance sheet data for US securities houses and US commercial banks at end-2008 Q1 and for other institutions at end-2007.
(c)
Total write-downs on trading book assets and available-for-sale financial instruments announced on or before 24 April 2008.
(d) Excludes provisional write-downs made by Deutsche Bank (US$4 billion), RBS (US$12 billion) and UBS (US$19 billion).
(e) Mortgage-backed securities and asset-backed securities. Principally includes US prime and Alt-A residential mortgage-backed securities.
(f)
Commercial mortgage-backed securities.
(g) RBS data for end-2007 include ABN Amro.
Chart 6 Losses on sub-prime asset-backed
securities(a)
Sources: Banks’ financial statements, Bank of America, BlackRock, Dealogic, JPMorgan Chase & Co., Moody’s Investors Service, Standard and
Poor’s and Bank calculations.
(a) See Box 1 on page 18 for details.
(b) Area below dotted line shows net write-downs by major UK banks and LCFIs since the start of 2007 to 22 April 2008, while total height of bar
shows an S&P estimate (published on 13 March 2008) of write-downs by all investors.
(c) In the absence of data on realised losses, this estimate is derived from data on actual delinquency rates on outstanding mortgages by vintage,
and an assumption about the transition from delinquency to default, as described in Box 1.
(d) This estimate is derived in the same way as for estimated credit losses, but assuming that serious delinquency rates on different vintages
continue to rise at their average rate to date until the mortgages are four years old, when they are assumed to be plateau. See Box 1 for details.
Chart 7 Illustrative implied marks on CDO supersenior tranches(a)(b)(c)
Sources: SEC filings, company reports and Bank calculations.
(a) Data are for six LCFIs. Not all firms have reported data in each of the categories.
Super-senior tranches are those that are above senior tranches in the capital structure.
(b) For two banks, reported average marks on positions are used. Otherwise, an implied mark is calculated as reported net exposures at end-2007,
relative to these net exposures plus net losses in that year. Estimating marks on the basis of net, rather than gross, figures is problematic as it does not
take into account any changes in hedges. The calculation also does not allow for purchases and sales of assets. In one case an adjustment is made for
disclosed changes in hedges and purchases/sales.
(c) Figures include liquidity commitments on CDOs where disclosed.
Chart 8 Tier 1 capital ratios(a)(b)(c)
Sources: Bloomberg, published accounts and Bank calculations.
(a) Weighted by total assets.
(b) Capital ratios measured under Basel I except for US securities houses. Capital ratios for US securities houses measured as ratio of tangible
common equity to total assets adjusted for secured assets, segregated assets, derivative liabilities, identifiable intangible assets and goodwill.
(c) RBS data for end-2007 include ABN Amro.
Chart 9 Major UK banks’ and LCFIs’ credit default swap
premia(a)(b)
Sources: Markit Group Limited, Thomson Datastream, published accounts and Bank calculations.
(a) Data to close of business on 22 April 2008.
(b) Asset-weighted average five-year premia.
(c) October 2007 Report.
Chart 10 Three-month interbank rates relative to
expected policy rates(a)(b)
Sources: Bloomberg and Bank calculations.
(a) Spread of three-month Libor to three-month overnight indexed swap (OIS) rates.
(b) Dashed lines show forward spreads derived from forward rate agreements as at 15 October 2007 and 22 April 2008.
(c) October 2007 Report.
Chart 11 Bear Stearns’ liquidity pool
Source: SEC.
Chart 12 Credit availability in the United Kingdom(a)
Source: Bank of England Credit Conditions Survey, 2008 Q1.
(a) Net percentage balances are calculated by weighting together the responses of those lenders who answered the survey questions on the
change in the availability of credit. The blue bars show the responses over the previous three months. The red diamonds show expectations for
the quarter in question, as measured three months earlier.
(b) A positive balance indicates that more credit is available.
Chart 13 Moody’s speculative-grade corporate bond
default rate and forecast(a)
Source: Moody’s Investors Service.
(a) Global trailing twelve-month issuer-weighted speculative-grade corporate bond default rate.
Table B Sources of tail risk in the period ahead: change in assessment
since October 2007
Source: Bank of England assessment.
(a)
Assessed change in the probability of a severe crystallisation of a vulnerability at some point over the next three years.
(b)
Assessed change in the expected impact on financial stability if a vulnerability is triggered in a severe scenario.
Chart 14 Judgement on levels of likelihood and
impact of key sources of tail risk
Source: Bank assessment.
(a) Probability of a severe crystallisation of a vulnerability at some point over the next three years.
(b) Expected impact on financial stability if a vulnerability is triggered in a severe scenario.
Table C Key actions to rebuild confidence
• The Bank of England has announced a new scheme to enable
banks and building societies to swap assets that are currently illiquid
in exchange for UK Treasury bills.
• Higher capital buffers would improve confidence by increasing
banks’ resilience to sudden changes in market sentiment and by
strengthening their capacity to handle a potential downturn in the
macroeconomy.
• Banks should supply more consistent, frequent and co-ordinated
information on their financial positions, including on key
assumptions used in, and uncertainties around, valuations.
• Authoritative guidance is needed on the application of fair-value
accounting rules when market prices are dislocated from
fundamental values.
• Originators, arrangers and distributors should provide enhanced
information on the composition of complex structured instruments.
Table D Key actions to improve ongoing financial stability
•
Firms should review whether the structure and effectiveness of risk management in
their firms are commensurate with the risks run in their business models.
•
Firms need to improve their planning for liquidity disruption in times of stress,
supported by stronger regulatory liquidity standards.
•
Rating agencies need to differentiate better between ratings on different types of
instruments and provide more information on the drivers of, and uncertainties around,
ratings.
•
Basel II will strengthen incentives to recognise risk, but areas for review include the
treatment of some securitisation exposures and off balance sheet commitments.
•
Potential procyclicality in Basel II needs to be monitored. Consideration should also
be given to countercyclical prudential policies to counteract the inherent procyclicality
in the financial system.
•
Central banks need to review, and where necessary, adapt their operations in the
light of the lessons from the turmoil.
•
Crisis management arrangements need strengthening, including through the
introduction in the United Kingdom of a special resolution regime for banks.
Internationally more effective practical arrangements are needed for handling crossborder crises.