Risk ManagementUniversity of Economics, Kraków, 2012

Tomasz Aleksandrowicz

risk at financial markets

current financial crisisfinancial risk management

Biggest XX centaury financial crises

• 1929 - Wall Street Crash (Great Depression)• 1973 – oil prices crisis (1973 – 1974 market crash)• 1987 – Black Monday (19 October)• 1989 – 1991 - savings and loan crisis (US)• 1990 - Japanese asset price bubble• 1992–93 – Black Wednesday (16 September)• 1994 - economic crisis in Mexico• 1997 - Asian financial crisis• 1998 - Russian financial crisis• 2001 - dot-com bubble

world financial crisis

financial crisis in 2007 – 2012 (?)case story: dramatic turn of events of 2008

phases of the crisis

• US housing bubble burst causing sub-prime mortgage crash (2006)

• banking and financial market crisis (2008 - 2009)• global recession (started 2009)• sovereign debt crisis (started 2010)

• 17 February – UK government nationalized struggling Northern Rock bank

• March 14 – Bear Stearns gets $30bn Fed funding as shares plummet

• March 16 – Bear Stearns is acquired for $240m a by JPMorgan Chase in a fire sale to avoid bankruptcy (worth $18bn year earlier)

• March - July – more banks around the world starts to announce huge losses many of them seek financing by issuing stock or from governments

• September 7 - US government takeover of Fannie Mae and Freddie Mac

• two companies at that time owned or guaranteed about half of the US $12 trillion mortgage market

• this move causes panic on the markets

• September 14 – Merrill Lynch, 158-year old investment bank is sold to Bank of America for $50bn

• September 15 – Lehman Brothers goes bankrupt

• Stock Exchange collapse: DIJA down 500 points, FTSE100 down 400 points

• September 16 – AIG credit ratings downgraded

• September 16 – $140bn withdrawn from money market funds which causes freeze of CP market

• September 17 – US FED lends $85bn to AIG to prevent bankruptcy

• September 18 – HBOS plc the biggest UK mortgage provider took over by Lloyds TSB for £12bn

US government response

• September 18 - Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke meets with legislators with proposal of $700 billion emergency bailout of toxic assets

• September 25 – due to bank run and $16.4bn deposit withdrawn in 10 days Washington Mutual is closed down by regulator – remaining assets sold to JP Morgan Chase for $1.9bn

• at that time bank assets were worth $307bn

• September 29 - Citigroup Inc. announced that he would acquire banking operations of Wachovia

• Later October 3: Wells Fargo makes a higher offer for Wachovia paying $15bn

• September 29 – September 31: As crisis hits Europe – more banks nationalized

• First days of October – Iceland banking sector nationalized

• stock exchange operations suspended

• rating agencies downgrades

• economic downturn • Iceland first country

to seek IMF help

US solution to liquidity crisis

• October 3 – President George W. Bush signs act creating a $700 bn Troubled Assets Relief Program (TARP) to purchase failing bank assets

• October 6 – Fed announces that it will provide $900 billion in short-term cash loans to banks

• October 7 – Fed makes emergency move to lend $1.3 trillion directly to companies outside the financial sector (effect of freeze in CP)

October 6 2008 – October 10 2008

• Worst week for the stock market in 75 years• The Dow Jones loses 22.1%, its worst week ever

on record, down 40.3 % since reaching a record high of 14,164.53 October 9, 2007.

• The Standard & Poor's 500 index loses 18.2 %, its worst week since 1933, down 42.5 % in since its own high October 9, 2007

World Recession in 2009 (% GDP change)

Europe sovereign debt crisis

roots of world financial crisis

causes of crisis in risk perspectivemain consequences

causes of financial crisis

• no simple answer• many direct and indirect factors• variety of narratives describing the crisis• highlights from risk management perspective

• Regulatory and market-based controls did not effectively protect this system or measure the buildup of risk

roots of financial crisis

• policy of deregulation of financial sector• historically low interest rates• derivatives market not regulated• rise of financial engineering and complexity of the securities• sub-prime loans and predatory loans• rating agencies paid by security issuer model• financial sector salaries and incentives connected with short

term performance (not regulated)• commodities boom

sources of financial risk

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