Overview
Chart 1 The phases of the crisis
Chart 2 US residential mortgage-backed securities
(RMBS) issuance(a)
Source: UBS.
(a) Issuance is on a gross basis.
Chart 3 Global collateralised debt obligation issuance(a)
Source: JPMorgan Chase & Co.
(a) Funded CDOs refer to instruments backed by corporate bonds; unfunded CDOs refer to instruments backed by credit default
swaps.
(b) Unfunded data for September not available.
Chart 4 US sub-prime mortgage delinquencies and
home equity loan index spreads(a)
Sources: Lehman Brothers, Mortgage Bankers Association and Thomson Datastream.
(a) The home equity loan asset-backed security sector is an amalgam of subsectors related to different underlying mortgage products,
including first lien sub-prime mortgage loans, closed-end second mortgage loans, so-called ‘high LTV (loan to value)’ mortgage loans, and
home equity lines of credit. This chart shows the higher-risk tranches of securities backed by such lending.
(b) US sub-prime residential mortgages 30+ days delinquency rate.
Chart 5 Range of delinquency rates on mortgages
backing US sub-prime securities(a)(b)
Sources: Bloomberg and Bank calculations.
(a) 60+ days delinquent, including foreclosures.
(b) Range of five RMBS (on each date) issued by (the same) major issuers.
Chart 6 Residential mortgage-backed securities
spreads across selected countries(a)(b)
Source: Lehman Brothers.
(a) A-rated five-year spreads over Libor except for Spain which uses ten-year spreads over Libor.
(b) All countries’ data are prime residential mortgage-backed securities except for the United States which uses home equity loans, which will
tend to be of lower quality.
Chart 7 Comovement between option-implied
volatility across assets(a)
Sources: British Bankers’ Association, Chicago Mercantile Exchange, Citi, Eurex, Euronext.liffe,
Royal Bank of Scotland and Bank calculations.
(a) Proportion of variation in changes in three-month option-implied volatility of UK, US and euro-area equities, interest rates and exchange rates
explained by the first principal component over a six-month rolling window.
(b) April 2007 Report.
Chart 8 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. Data shown are an exponentially weighted moving average. The
indicator is more reliable after 1997 as it is based on a greater number of underlying measures. Data have been revised
following methodological changes. See April 2007 Report, Box 2: Financial market liquidity, page 18.
Chart 9 US$-denominated commercial paper and Fed
funds rate(a)
Source: Board of Governors of the Federal Reserve.
(a) 30-day, AA commercial paper rates.bonds.
Chart 10 US$-denominated commercial paper outstanding
Source: Board of Governors of the Federal Reserve.
Chart 11 Spreads of international three-month interbank
rates to three-month expected policy rates(a)
Source: Bloomberg.
(a) Three-month Libor spreads over comparable overnight index swap rates.
Overview: Box A
Chart 1 Northern Rock: balance sheet growth and
liability structure — June 1998-June 2007
Source: Northern Rock Interim and Annual Reports.
Northern Rock has published IFRS based balance sheet data from 1 January 2004. In its UK GAAP balance sheet presentation prior to
this, non-recourse securitised lending was deducted from assets and the notes issued by the securitisation vehicle excluded from the
group’s debt liabilities. To achieve comparability with the later IFRS data these amounts have been included as securitised notes for the
period 1999 H1 to 2003 H2.
Chart 2 Five-year credit default swap premia
Source: Markit Group Limited.
Chart 3 Relative equity prices(a)
Sources: Bloomberg and Thomson Datastream.
(a) Countrywide’s price is deflated by the S&P 500 index and Northern Rock’s price by
FTSE All-items index.
Chart 12 Major UK banks’ credit default swap premia
Sources: Bloomberg, Markit Group Limited, published accounts and Bank calculations.
(a) Asset-weighted average five-year premia.
Table A Key lessons from recent events
Area of weakness
Specific issues raised
Liquidity management
•Underinsurance against closure of key funding markets.
•Inadequate recognition of contingent liquidity obligations
to off balance sheet entities.
•Scenarios used in the stress testing of funding
insufficiently severe.
Valuation of complex
structured products
•High dependency on models in valuation.
•Extent of investors’ reliance on a narrow ratings metric.
•Insufficient clarity in the composition and construction of
instruments.
Opacity of structured credit exposures
•Inadequate disclosure of exposures and losses.
•Lack of transparency in off balance sheet exposures.
Crisis management arrangements
•Insolvency arrangements for banks.
•Deposit insurance regime.
•Improvements in tripartite arrangements.
•Underdeveloped practical arrangements for managing
stress at an international institution.
Chart 13 Major UK banks’ wholesale funding as a
percentage of total funding(a)(b)
(a) 2007 data are as at 2007 H1.
(b) Wholesale funding is defined as interbank deposits plus debt securities in issue. Total funding is wholesale funding plus customer
deposits.rates.
Chart 14 Major UK banks’ Tier 1 capital ratios (a)(b)
Sources: Published accounts and Bank calculations.
(a) Tier 1 capital includes ordinary shares, associated reserves and retained earnings.
(b) All ratios reported on a Basel I basis.
(c) 2007 H1 figure..
Table B Price changes of risky assets
Changes between:
Changes
since:
April 2007
Report
31 Jan 2003
to
29 June 2007
1 July
to
31 Aug 2007
3 Sep
to
15 Oct 2007
World equity index(a)
116
-3
8
10
MSCI emerging
markets equity index(a)
265
1
18
36
Investment-grade
bond spreads(b)
-74
26
3
25
Sub-investment grade
bond spreads(b)
-432
125
-59
71
Emerging market bond
spreads(b)
-506
55
-41
2
¥/US$ exchange rate(a)
3
-5
1
-1
US asset-backed
commercial paper
spreads(b)
5
117
-68
51
Brent crude oil
price(a)
128
1
11
18
Sources: Bloomberg, Merrill Lynch, Reuters, US Federal Reserve and
Bank calculations.
(a) Per cent.
(b) Basis points.
Chart 15 Risk premium on three-month UK interbank lending (a)
Sources: Bloomberg and Bank calculations.
(a) Three-month sterling-Libor spread over sterling over overnight index average swap rate. Dotted lines show three-month forward
spreads.
Table C Estimated capital and funding impact on major UK banks of
unanticipated balance sheet expansion (a)
Change in Tier 1 ratio (per cent)
Extra funding (per cent)(b)
Extra risk-weighted
assets (£ billions)
Current
Prospective (c)
12.0
147.4
8.2
7.6
ABCP(d) -funded vehicles
7.7
109.1
-
(-0.40pp)
Leveraged buyouts
1.1
15.5
-
(-0.06pp)
MBS (e)
3.2
22.8
-
(-0.08pp)
Total
Of which:
Sources: Bank of England, Dealogic, Fitch Ratings Ltd and Bank calculations.
(a)
(b)
(b)
(c)
(d)
(e)
Assumes a scenario under which banks cannot distribute any assets for the remainder of 2007 and are required to provide full liquidity support to all
off balance sheet vehicles.
As a percentage of major UK banks’ funding obtained from interbank deposits and debt securities in issue.
Assumes LBO pipeline, ABCP liquidity support lines subject to 100% risk-weighting, mortgages not securitised subject to 50% risk-weighting. Based on capital
position at end-2006.
Asset-backed commercial paper.
Assumes value of mortgage-backed security (MBS) (defined as RMBS and CMBS) that cannot be issued by major UK banks is equal to average value of MBS
issued by these institutions in 2006 Q3 and 2006 Q4.
Chart 16 Corporate credit availability (a)
Source: Bank of England Credit Conditions Survey, 2007 Q3.
(a) A positive balance indicates more credit is available.
(b) Net percentage balances are calculated by weighting together the responses of those lenders who answered the question. The
blue bars show the responses over the previous three months. The magenta diamonds show the expectations over the next three
months. Expectations balances have been moved forward one quarter so that they can be compared with the actual outturns in the
following quarter. See www.bankofengland.co.uk/publications/other/monetary/creditconditionssurvey070926.pdf for further details.
Table D Key vulnerabilities in the period ahead: change in assessment
since April 2007
Source: Bank calculations.
(a) Assessed change in the probability of a vulnerability being triggered over the next three years.
(b) Assessed change in the expected impact on major UK banks’ balance sheets if a vulnerability is triggered over the next three
years.
Chart 17 LCFIs and major UK banks’ credit default swap
premia
Sources: Bloomberg, Markit Group Limited, published accounts and Bank calculations.
(a) Asset-weighted average five-year premia.