Global Financial Crisis By Anil.j

GLOBAL FINANCIAL CRISIS GBS,Hubli

Meaning The term financial crisis is applied broadly to a variety of situations Usually, some financial institutions or assets suddenly lose a large part of their value Banking Panics (and recessions) Stock market crashes Bursting of financial bubbles Currency crisis Sovereign defaults

Causes  The

International Financial Crisis Started with Losses in the US Housing Market.  (Macro-Economic cause): Profligate Lending Led to Losses.  (Micro-Economic): Excessive Land Use Regulation exacerbated Losses.

Stages 

First, it began with the housing bubble in the U.S. that was increasingly inflated by sub prime and near prime mortgage lending.

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It spread into other types of assets and affected not only mortgage companies and specialized investment banks, but also universal banks.

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It induced the global liquidity crisis accompanied by a massive pullout of liabilities from the most severely exposed banks, i.e. Northern Rock, Bear Stearns and, later, Lehman Brothers, triggering anxiety about possible credit contagion from counterparty risk on the global scale.

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Fourth, the collapse of structured investment products, mainly collateralized debt obligations (CDOs), shifted the global liquidity allocations into

Subprime loans  Subprime

lending is the practice of lending mainly in the form of mortgages for the purchase of residences, to borrowers who do not meet the usual criteria for borrowing at the lowest prevailing market interest rate .  Sub prime loans are those made to least credit worthy applicants.

IMPACT  Banks

were the major cause for the crisis and they them self were the first to suffer.  A crisis signaling the decline of US’s superpower status  Collapse of giant financial institutions like Lehman Bros and many others  Fall in a stock market  AIG was rescued for $85 billion credit from govt.  Merrill lynch was taken over by BOA

Securitization

Securitization What is securitization? It refers to the process of liquidating the illiquid and long term assets like loans and receivables of financial institution like banks by issuing marketable securities against them.

The following are the assets generally securitized by financial institution Credit card receivables Hire purchase loans like vehicle loans Mortgage loans etc..

The various stages involved in the working of securitization are as follows 

Identification stage

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Transfer stage

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Issue stage

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Redemption stage

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Credit rating stage

Redemption stage  The

redemption stage and repayments of interest on these securities are facilitated by collections received by the SPV from the securitization assets. The task of collection of dues is generally entrusted to the originator or special servicing agent can be appointed for this purpose. This agency is paid a certain percentage of commission for the collection service rendered.

Credit rating The pass through certificates have to be publicly issued require credit rating by a good credit agency so that they becomes more attractive and easily acceptable . Pass through certificates like debentures, these certificates before maturity are tradable in secondary market to ensure liquidity for the investors.

Impact of securitization 

Banks borrowed even more money to lend out so they could create more securitization. Some banks didn’t need to rely on savers as much then, as long as they could borrow from other banks and sell those loans on as securities

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Some investment banks like Lehman Brothers got into mortgages, buying them in order to securitize them and then sell them on.

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Running out of who to loan to, banks turned to the poor; the sub prime, the riskier loans. Rising house prices led lenders to think it wasn’t too risky; bad loans meant repossessing high-valued

CDO’s:

Collateralized debt obligations (CDOs) are a type of structured asset-backed security (ABS) whose value and payments are derived from a portfolio of fixed-income underlying assets. A CDO is nothing more than a redistribution of credit risk. CDOs are unique in that they represent different types of debt and credit risk. In the case of CDOs, these different types of debt are often referred to as 'trenches' or 'slices'. Each slice has a different maturity and risk associated with it. The higher the

Networking of banks across the globe Networking of banks here means exposure of one bank to other bank. Monetary

the

Exposure

Eg: Country's largest private sector lender, ICICI Bank’s London subsidiary had 57 million Euro (about Rs 375 crore) exposure in the Lehman Brothers which filed bankruptcy. Investors rushed to sell shares of ICICI Bank Ltd, dragging the bank’s stock down by at

The country's largest bank, State Bank of India (SBI), has $5 million exposure to Lehman Brothers against its global balance sheet of $250 billion.

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