The Credit Crunch and its
Consequences
Howard Davies
Director, LSE
Moscow
17th November 2008
Act One: Subprime
Case-Schiller Home Price Index
2000-2008
200
Index
150
100
50
0
Q1
Q1
Q1
Q1
Q1
Q1
Q1
2000 2001 2002 2003 2004 2005 2006
Q1
Q3
2007
Q4
Q1
Q2
2008
Year & Quarter
Source: Wikipedia
Mortgage Origination by Product (%)
100
90
80
70
60
50
40
30
20
10
0
2001
2002
2003
Prime
2004
Subprime
2005
2006
Alt-A
Notes:
1.
Total mortgage origination excludes seconds and home equity lines of credit
2.
For relative growth versus 2001, 2007 annualized based on 9 months of date
9m 2007
Recent ABX BBB Price History
Price
Source: Markit Partners
Resecuritisation
Capital Structure Containing
Subprime Loans
Subprime Mezzanine CDO
Containing BBB Subprime Bonds
100%
100%
11%
SUPER
SENIOR
CUMULATIVE
LOSSES
AAA
AAA
8.6%
40%
AAA
28%
20%
11%
7%
0%
AA
AA
A
BBB
Residual/
Equity
A
11%
7%
BBB
7%
Equity
0%
Act Two: Liquidity
Sources: Bloomberg and Bank
calculations
Act Three: Unravelling
-Bear Stearns, Indymac, Wa mu
-HBOS, RBS
-Fortis, Dexia etc.
Act Four: Meltdown
Act Five: Pumping
The Credit Crisis: A Five-Act
Tragedy
Act One:
Subprime
Act Two:
Liquidity
Act Three:
Unravelling
Act Four:
Meltdown
Act Five:
Pumping
EU Growth Rates: IMF Forecasts
10
8
6
2007
2008
4
2009
2
0
Germany
-2
France
Russia
UK
Source: www.ft.com
Five Ways
1. Legitimacy – why Luxembourg
and not China?
Global Committee Structure - A
Regulator’s View
G-7
(Gov’ts)
IMF
World Bank
(Gov’ts)
OECD
(Gov’ts)
WTO
FATF
(Money Laundering)
IASB
(Accounting
Financial Stability
Forum
IAASB
(Audit)
Bank for International
Settlements
(Central Banks)
G-10
(Central Banks)
CGFS
Basel
(Banking)
CPSS
IOSCO
(Securities)
Joint Forum
IAIS
(Insurance)
PIOB
IASC
Monitoring
Group
IFIAR
(Audit)
Source: Adapted with permission from Sloan and
Fitzpatrick in Chapter 13, The Structure of
International Market Regulation, in Financial
Markets and Exchanges Law, Oxford University
Press, March 2007
Five Ways
2. Simpler, co-ordinated mechanisms
which better reflect the shape of
today’s markets
National Regulatory Structures
57
3
Other bank
regulators
49
35
Central
banks as
banking
regulator
7
54
28
No Central
Bank
interest
10
Central
Bank
39
Non-Central
Bank
Central
bank as one
pillar
2
Tripartite
Dual
'Twin Peaks'
Unified regulator
Source: How Countries Supervise their Banks, Insurers and Securities Markets
2007: Central Bank Publications
Five Ways
3. Speed: Basel 2 took a decade
Five Ways
4. Stronger links between
macroeconomic surveillance and
regulation
•
A new G (G12)
•
Standing group of Finance Ministers
Five Ways
5. Political leadership
Five ways to fix our Financial
Architecture
1. Legitimacy – why Luxembourg and not
China?
2. Simpler, co-ordinated mechanisms which
better reflect the shape of today’s
markets
3. Speed: Basel 2 took a decade
4. Stronger links between macroeconomic
surveillance and regulation
5. Political leadership
“ Bank failures are caused by
depositors who don’t deposit
enough money to cover the
losses due to mismanagement”.
Dan Quayle
The Credit Crunch and its
Consequences
Howard Davies
Director, LSE
Moscow
17th November 2008