Upload
jeffry-patrick
View
214
Download
0
Embed Size (px)
Citation preview
Financial Integration and Global Financial Turmoil
Hamid FaruqeeAssistant to the Economic Counsellor
Research Department, IMFJune 25, 2008
Overview
Financial Integration
Financial Stability
Europe’s Road to a “Single Market” in Financial Services
Integrating Europe’s Financial Markets
Europe’s Road to a “Single Market” in Financial Services
Treaty of Rome (1957)
EMU (1999)
FSAP (2005)
Banking Directive (1989)
Capital Flows (1988)
Single European Act (1986)
Internal Market (1993)
Financial Integration: Concepts, Benefits & Risks
Autarky
“Single Market”
Interdependent Markets
Competition & Arbitrage
Scale Economies & Innovation
Completeness & Risk Sharing
“As Europe’s system of financial markets continues to evolve, so to will the risks... integration will introduce risks that are not yet known and that are more likely to spread...” (p. 40)
Evolving Risks from Integrating Financial Markets
Global Financial Turmoil Epicenter — U.S. Subprime Mortgage Crisis
Tremors — Credit Squeeze & Rising Spreads, Liquidity Strains in Term-Funding (ABCP / Interbank)
Wider Aftershocks and Fault Lines —Frozen Markets in ABS/CDO, Valuation problems, Bank Capital, Monoline Insurers, Liquidity “run”
Policy Issues — “Front-end” (mortgages) and “Back-end” policy reactions (liquidity)
7U.S. Subprime Delinquencies(in percent of total subprime loan amount; 2007Q1)
0% to 9%10% to 14%15% to 19%20% or more
8
0% to 9%10% to 14%15% to 19%20% or more
U.S. Subprime Delinquencies(in percent of total subprime loan amount; 2007Q2)
9U.S. Mortgage Resets and U.S. Mortgage Resets and DelinquenciesDelinquencies
Housing Market Delinquencies(percent of total residential loans
outstanding)
0
2
4
6
8
10
12
14
16
18
20
98 99 00 01 02 03 04 05 06 07 08
ForeclosuresPrimeSubprime
0
5
10
15
20
25
30
35
40
45
50
J un-07
Dec-07
J un-08
Dec-08
J un-09
Dec-09
Option adjustable rate mortgage
Subprime
Alt-A
Prime
Agency
Monthly Mortgage Rate Resets
(in billions of U.S. dollars)
Months to first reset
10
0
2
4
6
8
10
12
14
16
18
20
22
24
26
28
30
0 10 20 30 40 50 60
Months after origination
0.0
0.5
1.0
1.5
2.0
2.5
0 10 20 30 40 50 60
Subprime Prime
2003
2006
2000
2002
2005
2001
2004
20072003
2004
2002
20052000
2001
2006
2007
Mortgage Delinquency by Vintage year(60+ days delinquencies; in percent of balance)
11U.S. House Prices and Mortgage Delinquencies
Sources: Moody's Economy.com, Equifax, Case-Shiller and OFHEO.1/ Delinquency rate defined in percent of outstanding mortgages (in dollar amounts).
-2
0
2
4
6
8
-30% -20% -10% 0% 10% 20%
House Price Changes, 06Q2 - 07Q3(in percent)
Ch
ang
e in
Mo
rtg
age
Del
inq
uen
cy R
ate
, 05Q
4 -
07Q
4(i
n p
erc
en
t p
oin
ts)
1/
MidwestWest
SouthNortheast
12
0
10
20
30
40
50
60
70
80
90
100
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
failed acquired
Virtual Shutdown of Subprime Lending
Mortgage-Related Company Failures and Acquisitions
13
0
50
100
150
200
250
300
350
400
450
500
550
600
650
Jan-06 Aug-06 Mar-07 Oct-07 May-08
A-rated
BBB-rated
BB-rated
Corporate Spreads(basis points)
6/6
0
50
100
150
200
250
300
350
400
450
500
Jan-06 Aug-06 Mar-07 Oct-07 May-080
200
400
600
800
1000
1200
1400
1600
1800
2000Conforming
Jumbo
Subprime ABS (RHS)
Mortgage Spreads(in basis points; rel. to 1-m
LIBOR)
6/9
U.S. Interest Rate Spreads and Credit U.S. Interest Rate Spreads and Credit SqueezeSqueeze
14
0
100
200
300
400
500
600
700
97 98 99 00 01 02 03 04 05 06 07 08
0
2
4
6
8
10
12
Default rates—Total (RHS)
Default rates—Speculativegrade (RHS)
AA (LHS)
BBB (LHS)
BB (LHS)
Corporate Default Rates and Bond Spreads 1/
(default rates in percent; bond spreads in basis points)
1/ Speculative grade defaults based on Moody’s data through end-March.
15
-20
-10
0
10
20
30
40
50
60
2005 2006 2007 2008
Loans to small/ medium-sized companiesLoans to large companies
Consumer credit
Housing loans
Bank Surveys and Tighter Lending Conditions
(Change in credit standards over past 3 months; in percent 1/)
1/ Change in the balance of respondents between the “tightened considerably and tightened somewhat" and the "eased somewhat and eased considerably.“
ECB’s Lending Survey
-80
-70
-60
-50
-40
-30
-20
-10
0
10
20
30
40
50
60
70
80
2005 2006 2007 2008
C&I loans to firmsCommercial real estateResidential mortgagesResidential mortgages: primeResidential mortgages: subprimeConsumer loans (excl. credit cards)
Fed’s Lending Survey
16
-20
0
20
40
60
80
100
120
Jan-07 May-07 Sep-07 Jan-08 Jun-08
UnitedStates
Euro area
Japan
UnitedKingdom
0
20
40
60
80
100
120
140
160
180
200
220
240
260
Jul-07 Sep-07Nov-07 Jan-08Mar-08May-08
Liquidity and Credit Strains
3-Month LIBOR Spreads to OIS
(Overnight index swap; in basis points)
Bank CDS Spreads(5-years; in basis points; Median)
Europe
U.S.
6/6 6/6
17
0
25
50
75
100
125
150
175
200
225
250
275
300
325
350
Jul-07
Sep-07
Nov-07
Jan-08
Mar-08
May-08
0
50
100
150
200
250
300
350
400
450
500
Jul-07
Sep-07
Nov-07
Jan-08
Mar-08
May-08
Global CDS Spreads(5-years; in basis points)
Investment Grade
United States Major Economies 1/
World 1/ 2/
Source: IMF staff estimates.1/ Consolidated series based on investment grade entities from various sectors. Asia ex. Japan includes some non-investment grade entities.2/ Median based on U.S., Europe, Japan, Asia ex. Japan. Shaded area represent (+/-) one standard deviation.
InvestmentBanks
Commercial Banks
U.S.
Europe
Japan
Below Investment
Grade
0
25
50
75
100
125
150
175
200
225
250
275
300
325
350
Jul-07
Sep-07
Nov-07
Jan-08
Mar-08
May-08
Asia ex. Japan
6/9 6/9 6/9
18
0
100
200
300
400
500
600
700
Writedowns 1/ Capital Raised
US Europe Asia
Global Bank Writedowns and Capital Infusion
(in billions of U.S. dollars)
1/ Includes writedowns due to asset valuation, yet to be passed through income statement.
392.4
291.7
19
-10
-5
0
5
10
15
20
25
30
35
House “Price Gaps” and Monetary Policy Rates
Source: IMF staff calculations.
0
1
2
3
4
5
6
7
8
Jan-06 Aug-06 Mar-07 Oct-07 May-08
House “Price Gaps”(in percent of real house prices)
Monetary Policy Rates(in percent)
U.K.
Australia
U.S.
Japan
ECB
Key Lessons and Policy Issues Incentives and Standards — Oversight & Agency Problems in “Originate-to-Distribute” / Securitization
Credit Risk Transfer — ”Boomerang” from SIVs back to Banks; off-balance sheet transparency
Liquidity Fragility — at times of market stress, Complacency Problem & Counterparty Implications
Complex Products — Valuation Problems, Reliance on Rating Agencies, Breakdown of Due Diligence