The Recent Credit Crunch
The Recent Credit Crunch Paul Mizen Centre for Finance and Credit Markets University of Nottingham
Outline • What happened? • What was different about this credit crunch? • What are the challenges it presents to policymakers? • What is the economic research agenda?
Great Moderation in Inflation and Short-term Interest Rates
Source: Bank of England
Loan to Income Ratios UK First-time Buyers
Sources: Bank of England, FSA, Survey of Mortgage Lenders and University of Essex. (a) Chart illustrates proportion of new mortgages with loan to income ratios greater than 2.5, 3.5 and 4.5.
US Residential Mortgage Delinquency Rate
Sources: Mortgage Bankers Association and Thomson Datastream. (a) 30+ days delinquent.
Sub-prime Mortgage Delinquency Rates by Originator
Source: Bank of England, Bloomberg. (a) 60+ days delinquent, including foreclosures for loans originated in 2005 H2.
Global Issuance of ABSs and CDOs
Sources: Bank of England, Dealogic and Sifma.
FT Subprime Losses by Banks Writedown
Credit loss
US$ bn
Company
Total
1
UBS
38.0
38.0
2
Merrill Lynch
25.1
25.1
3
Citigroup
21.4
2.5
23.9
4
HSBC
3.0
9.4
12.4
5
Morgan Stanley
6
11.7
11.7
IKB Deutsche
9.0
9.0
7
Bank of America
7.3
8
Deutsche Bank
7.4
7.4
9
Crédit Agricole
6.5
6.5
10
Credit Suisse
6.3
6.3
0.9
8.2
Projected Cumulative Credit Losses on US Sub-prime MBSs
Sources: Bank of England, Bank of America, BlackRock, Dealogic, JPMorgan Chase & Co., Moody’s Investors Service.
Estimated Loss of Market Value of US Sub-prime MBSs
Sources: Bank of England, Bank of America, BlackRock, JPMorgan Chase & Co.
Source: Financial Times US Eurozone UK 14/01/2008
31/12/2007
17/12/2007
03/12/2007
19/11/2007
05/11/2007
22/10/2007
08/10/2007
24/09/2007
10/09/2007
27/08/2007
13/08/2007
30/07/2007
16/07/2007
02/07/2007
18/06/2007
04/06/2007
21/05/2007
07/05/2007
23/04/2007
09/04/2007
26/03/2007
12/03/2007
26/02/2007
12/02/2007
29/01/2007
15/01/2007
01/01/2007
LIBOR Spreads
SPREADS BETWEEN INTERVENTION RATES AND THREE-MONTH LIBOR
1.4
1.2
1
0.8
0.6
0.4
0.2
0
-0.2
-0.4
-0.6
-0.8
Nothern Rock Funding Retail
Wholesale
Securitisation
Total liabiliti es
Capital and reserv es
Increase over previous year
18.3
-0.5
2.5
2.9
10.6
2.7
Closing Balances
101.0
7.7
22.6
24.2
40.2
6.2
2006 £bn
Source: Milne and Wood 2008.
Covered bonds
Unusual Features • First run since the 19th century on the British bank • Triggered by a leak about a support operation planned by the authorities • Fully contained within one institution and did not spread
Information Asymmetries
Scope of Regulation • Should ratings agencies be regulated. France proposes registration. • Should SIVs and Conduits be listed or regulated. • FSF proposes changes to increase costs of warehousing by banks of ABS products. • Design of self-administered stress tests.
Central Bank Operations • Control over short term interest rates • Problems with standard liquidity management tools • Stigma associated with borrowing • Moral Hazard and rescue of troubled institutions • Lender of last resort and bailouts
Research Issues • Capital Markets – Information requirements to facilitate ratings and due diligence for ABSs – Nature and scope of stress tests
• Money Markets – Monetary operations and control – LIBOR – value as a benchmark – Pass through and monetary transmission
Research Issues • Credit and the Real Economy – Is the worst over? – What will be the real implications? – How long and deep will any recession be?
Official Interest Rates
Sources: Bloomberg, Reuters and Bank calculations. (a) Solid lines are historical official rates. Dotted lines for the United Kingdom, the United States and the euro area are derived from OIS contracts. Dotted lines for Japan show one-week forward rates.
Change in Quoted Mortgage Rates for UK Households v. Bank Rate
Sources: Bank of England and Bloomberg.
Interest Rates for UK Firms
Sources: Bank of England and Bloomberg.
UK Property Prices
Sources: Bank of England, Halifax, Investment Property Databank, Nationwide and Thomson Datastream.
Global Slowdown CONSENSUS FORECASTS OF GROWTH FOR 2008 3.5 3.0 2.5 2.0
1.5 1.0 Source: Consensus Forecasts 0.5 0.0 Jan07
Feb07
Mar07
Apr07
May07
USA 2008
Source: Financial Times
Jun07
Jul-07 Aug07
UK 2008
Sep07
Japan 2008
Oct07
Nov07
Dec07
Eurozone 2008
Jan08
Feb08
Outline • What happened? • What was different about this credit crunch? • What are the challenges it presents to policymakers? • What is the economic research agenda?
Great Moderation in Inflation and Short-term Interest Rates
Source: Bank of England
Loan to Income Ratios UK First-time Buyers
Sources: Bank of England, FSA, Survey of Mortgage Lenders and University of Essex. (a) Chart illustrates proportion of new mortgages with loan to income ratios greater than 2.5, 3.5 and 4.5.
US Residential Mortgage Delinquency Rate
Sources: Mortgage Bankers Association and Thomson Datastream. (a) 30+ days delinquent.
Sub-prime Mortgage Delinquency Rates by Originator
Source: Bank of England, Bloomberg. (a) 60+ days delinquent, including foreclosures for loans originated in 2005 H2.
Global Issuance of ABSs and CDOs
Sources: Bank of England, Dealogic and Sifma.
FT Subprime Losses by Banks Writedown
Credit loss
US$ bn
Company
Total
1
UBS
38.0
38.0
2
Merrill Lynch
25.1
25.1
3
Citigroup
21.4
2.5
23.9
4
HSBC
3.0
9.4
12.4
5
Morgan Stanley
6
11.7
11.7
IKB Deutsche
9.0
9.0
7
Bank of America
7.3
8
Deutsche Bank
7.4
7.4
9
Crédit Agricole
6.5
6.5
10
Credit Suisse
6.3
6.3
0.9
8.2
Projected Cumulative Credit Losses on US Sub-prime MBSs
Sources: Bank of England, Bank of America, BlackRock, Dealogic, JPMorgan Chase & Co., Moody’s Investors Service.
Estimated Loss of Market Value of US Sub-prime MBSs
Sources: Bank of England, Bank of America, BlackRock, JPMorgan Chase & Co.
Source: Financial Times US Eurozone UK 14/01/2008
31/12/2007
17/12/2007
03/12/2007
19/11/2007
05/11/2007
22/10/2007
08/10/2007
24/09/2007
10/09/2007
27/08/2007
13/08/2007
30/07/2007
16/07/2007
02/07/2007
18/06/2007
04/06/2007
21/05/2007
07/05/2007
23/04/2007
09/04/2007
26/03/2007
12/03/2007
26/02/2007
12/02/2007
29/01/2007
15/01/2007
01/01/2007
LIBOR Spreads
SPREADS BETWEEN INTERVENTION RATES AND THREE-MONTH LIBOR
1.4
1.2
1
0.8
0.6
0.4
0.2
0
-0.2
-0.4
-0.6
-0.8
Nothern Rock Funding Retail
Wholesale
Securitisation
Total liabiliti es
Capital and reserv es
Increase over previous year
18.3
-0.5
2.5
2.9
10.6
2.7
Closing Balances
101.0
7.7
22.6
24.2
40.2
6.2
2006 £bn
Source: Milne and Wood 2008.
Covered bonds
Unusual Features • First run since the 19th century on the British bank • Triggered by a leak about a support operation planned by the authorities • Fully contained within one institution and did not spread
Information Asymmetries
Scope of Regulation • Should ratings agencies be regulated. France proposes registration. • Should SIVs and Conduits be listed or regulated. • FSF proposes changes to increase costs of warehousing by banks of ABS products. • Design of self-administered stress tests.
Central Bank Operations • Control over short term interest rates • Problems with standard liquidity management tools • Stigma associated with borrowing • Moral Hazard and rescue of troubled institutions • Lender of last resort and bailouts
Research Issues • Capital Markets – Information requirements to facilitate ratings and due diligence for ABSs – Nature and scope of stress tests
• Money Markets – Monetary operations and control – LIBOR – value as a benchmark – Pass through and monetary transmission
Research Issues • Credit and the Real Economy – Is the worst over? – What will be the real implications? – How long and deep will any recession be?
Official Interest Rates
Sources: Bloomberg, Reuters and Bank calculations. (a) Solid lines are historical official rates. Dotted lines for the United Kingdom, the United States and the euro area are derived from OIS contracts. Dotted lines for Japan show one-week forward rates.
Change in Quoted Mortgage Rates for UK Households v. Bank Rate
Sources: Bank of England and Bloomberg.
Interest Rates for UK Firms
Sources: Bank of England and Bloomberg.
UK Property Prices
Sources: Bank of England, Halifax, Investment Property Databank, Nationwide and Thomson Datastream.
Global Slowdown CONSENSUS FORECASTS OF GROWTH FOR 2008 3.5 3.0 2.5 2.0
1.5 1.0 Source: Consensus Forecasts 0.5 0.0 Jan07
Feb07
Mar07
Apr07
May07
USA 2008
Source: Financial Times
Jun07
Jul-07 Aug07
UK 2008
Sep07
Japan 2008
Oct07
Nov07
Dec07
Eurozone 2008
Jan08
Feb08
