The First Credit Market Turmoil of the 21st Century : Implications for Public Policy.

By: Evanoff, Douglas DContributor(s): Hartmann, Philipp | Kaufman, George GMaterial type: TextTextSeries: World Scientific Studies in International Economics SerPublisher: Singapore : World Scientific Publishing Co Pte Ltd, 2009Copyright date: ©2009Description: 1 online resource (404 pages)Content type: text Media type: computer Carrier type: online resourceISBN: 9789814280488Subject(s): Credit control -- History -- 21st century -- Congresses | Global Financial Crisis, 2008-2009 -- Congresses | International finance -- CongressesGenre/Form: Electronic books.Additional physical formats: Print version:: The First Credit Market Turmoil of the 21st Century : Implications for Public PolicyDDC classification: 338.542 LOC classification: HB3722 -- .I58 2009ebOnline resources: Click to View
Contents:
Intro -- Contents -- Preface -- Acknowledgements -- I. Special Addresses -- Central Banks and the Financial Turmoil José Manuel González-Páramo, European Central Bank -- 1. Introduction1 -- 2. The Separation Between Monetary Policy Formulation and its Implementation -- 3. The Impact of the Turmoil on the Monetary Transmission Mechanism -- 4. The Role of Uncertainty -- 5. Conclusion -- The Implications of the Credit Crisis for Public Policy Charles H. Dallara, Institute of International Finance -- Where Are Our Leaders? Kenneth W. Dam, University of Chicago -- Trust and Financial Markets Paola Sapienza, Northwestern University -- 1. Trust and Finance -- 2. Does It Matter Who You Trust? -- 3. What Determines Trust? -- 4. Trust and Regulation -- References -- II. What Happened, Where? -- A View of the U.S. Subprime Crisis Robert DiClemente, Citigroup, and Kermit Schoenholtz, New York University -- 1. Introduction -- 2. The Setting -- 3. The Policy Response -- 4. The Role of Financial Conditions -- 5. Where Do We Go from Here? -- References -- What Has Happened in Europe? Monetary Policy, Lending Cycles, Banking Competition, Risk-Taking, and Regulation Jesús Saurina, Banco de España -- 1. Introduction -- 2. What Has Happened in Europe? -- 3. Why Has It Happened? Some Potential Explanations -- 3.1 Competition and risk-taking -- 3.2 Monetary policy and risk-taking -- 3.3 Lending standards -- 4. What Can Be Done? Countercyclical Regulation -- 5. Lessons for Bank Regulation/Supervision -- 6. Conclusion -- References -- The Subprime Crisis Effects in the Rest of the World Laura E. Kodres, International Monetary Fund -- 1. Before and Now -- 2. Why? -- 3. Who? Linkages Known and Unknown -- 4. What's Next? -- 5. What Can Anyone Do about It? -- III. How Serious is the Damage?.
Bank Failures: The Limitations of Risk Modeling Patrick Honohan, Trinity College and Center for Economic Policy Research -- 1. Introduction and Summary -- 2. Four Failure Categories -- 2.1 Case A: "Diversified survivor" - UBS -- 2.2 Case B: "Ruined gambler" - Sachsen Landesbank -- 2.3 Case C: "Too opaque to survive in the market" - Northern Rock -- 2.4 Case D: "Overleveraged mortgage lender" - The GSEs -- 3. Conclusion -- References -- Comments: How Serious is the Damage? Christopher Kent, Reserve Bank of Australia -- 1. Overview - Lessons from Australia's History of Financial Turmoil -- 2. Patrick Honohan - Bank Failures: The Limitations of Risk Modelling -- 3. David Greenlaw - Costs for the Real Economy of Balance Sheet Problems -- 4. S. "Vish" Viswanathan - Damage to Financial Markets -- 5. Concluding Remarks -- References -- IV. Why did It Go Undetected/Underestimated for So Long? -- Cliff Risk and the Credit Crisis Joseph R. Mason, Louisiana State University -- 1. Introduction -- 2. How to Post Record Profits with Negative Cash Flows -- 3. How to "Sell" Without Transferring Responsibility -- 4. Without Risk Transfer There Can be No True Sale -- 5. Summary and Conclusion: Everything Old is New Again -- References -- The Credit Crunch of 2007: What Went Wrong? Why? What Lessons Can be Learned? John C. Hull, University of Toronto, Canada -- Abstract -- 1. Introduction -- 2. The U.S. Housing Market -- 3. Securitization -- 4. Lessons -- 4.1 Agency costs: Originators and investors -- 4.2 Agency costs: Financial institutions and their employees -- 4.3 Transparency -- 4.4 The need for models -- 4.5 How models should be used -- 5. Conclusions -- References -- Overdependence on Credit Ratings was a Primary Cause of the Crisis Frank Partnoy, University of San Diego School of Law -- 1. Introduction.
2. Some Background and Theory: Reputation versus Regulatory Licenses -- 3. The Growth of "Second-Level" Mortgage Securitization -- 4. Credit Ratings as Drivers of Second-Level Securitizations -- 5. Regulatory versus Behavioral Overdependence -- 6. Some Policy Prescriptions -- 7. Conclusion -- V. Experience with Crisis Management -- Liquidity Management Under Market Turmoil: Experience of the European Central Bank in the First Year of the 2007-2008 Financial Market Crisis Nuno Cassola, Cornelia Holthausen and Flemming Würtz, European Central Bank -- 1. Introduction -- 2. ECB Liquidity Management Under Normal Market Conditions -- 2.1 Last day of the reserve maintenance period -- 2.2 Before the last day of the reserve maintenance period -- 3. ECB Liquidity Management Under Turbulent Market Conditions -- 3.1 Automatic stabilizers -- 3.1.1 Counterparties and size of operations -- 3.1.2 Reserve requirements -- 3.1.3 Eligible assets -- 3.1.4 Marginal lending facility -- 3.2 Liquidity management -- 3.2.1 Fixed rate tenders with full allotment -- 3.2.2 The separation principle -- 3.2.3 Frontloading -- 3.2.4 Narrow corridor with large surplus -- 3.2.5 Lengthening the maturity structure of refinancing and the term auction facility -- 4. An Overall Assessment of the Liquidity Policy -- 4.1 Short-term interest rates before and during the turmoil -- 4.2 Recourse to standing facilities -- 4.3 Limits to the current frontloading policy -- 5. Conclusions and Open Issues -- References -- Crisis Management and Financial Stability: Some Lessons from the United Kingdom Nigel Jenkinson, Bank of England -- 1. Introduction -- 2. Northern Rock -- 3. Liquidity Risk Management and Supervision -- 4. Deposit Insurance -- 5. Bank Resolution -- 6. Central Bank Operations -- 7. Strengthening Future System Resilience -- References.
VI. Implications for Basel II and Bank Capital Regulation -- Risk Management Failures During the Financial Crisis Michel Crouhy, NATIXIS Corporate and Investment Bank -- 1. Introduction -- 1.1 Information problems -- 1.2 Liquidity problems -- 2. What Went Wrong in Risk Management and Risk Modeling -- 2.1 Over-reliance on misleading ratings from rating agencies -- 2.1.1 "Cliff" effects or nonlinearities in the risk of subprime CDO tranches -- 2.1.2 Wrong estimates of default rates and default correlations13 -- 2.1.3 Sensitivities of the rating of senior subprime CDO tranches to estimation errors of delinquency rates, recovery rates and default correlations -- 2.2 Over-reliance on unrealistically simple risk models -- 2.3 Over-reliance on inaccurate data -- 2.4 Over-reliance on short-term financing with too little consideration for liquidity risk -- 3. Lessons From This Fiasco -- 3.1 Differentiate the ratings of corporate bonds and structured credit products -- 3.2 Check the quality of the data about the underlying assets and make sure it is complete and timely -- 3.3 Complement the traditional VaR risk measure with worst-case scenario analysis and stress testing -- References -- A Supervisor's View of the Current Financial Turmoil Cathy Lemieux and Steven VanBever, Federal Reserve Bank of Chicago -- References -- The Subprime Crisis: Lessons About Market Discipline Mark J. Flannery, University of Florida -- 1. The Crisis -- 1.1 What happened? -- 1.2 Why did it happen? -- 1.2.1 Underwriters -- 1.2.2 Investors -- 1.2.3 Rating agencies -- 2. What is "Market Discipline"?6 -- 3. Viewing Market Discipline Through a Subprime Lens -- 3.1 Lessons about market monitoring -- 3.2 Lessons about market influence -- 3.2.1 Agency and incentive problems -- 3.2.2 Raising capital -- 3.2.3 Lessons about rating agencies -- 3.2.4 Summary -- 4. Where Should We Go From Here?.
5. Summary -- References -- Comments: Implications for Bank Capital Standards/Regulation Robert E. Litan, The Kauffman Foundation and The Brookings Institution -- VII. Implications for Regulation of Financial Markets and Instruments -- Implications of the Crisis for Regulation Mark Carey, Board of Governors of the Federal Reserve System -- 1. Introduction -- 2. Not Financial Engineering -- 3. Not Bad Risk-Management Models -- 4. Not Subprime Mortgage-Related Credit Losses -- 5. Not Inadequate Capitalization of Banks -- 6. Not Inept Prudential Supervision -- 7. Not Moral Hazard from the Safety Net -- 8. Asymmetric Financial Services Industry Compensation Profiles Did Contribute to the Crisis -- 9. An Incomplete Regulatory Model Did Contribute to the Crisis -- 10. Ways Forward -- 11. Concluding Remarks -- References -- The Seven Deadly Frictions of Subprime Mortgage Credit Securitization Adam B. Ashcraft and Til Schuermann, Federal Reserve Bank of New York -- 1. Frictions Between the Mortgagor and Originator: Predatory Lending -- 2. Frictions Between the Originator and the Arranger: Predatory Lending and Borrowing -- 3. Frictions Between the Arranger and Third Parties: Adverse Selection -- 3.1 Adverse selection and the warehouse lender -- 3.2 Adverse selection and the asset manager -- 3.3 Adverse selection and credit rating agencies -- 4. Frictions Between the Servicer and the Mortgagor: Moral Hazard -- 5. Frictions Between the Servicer and Third Parties: Moral Hazard -- 6. Frictions Between the Asset Manager and Investor: Principal-Agent -- 7. Frictions Between the Investor and the Credit Rating Agencies: Model Error -- 8. Five Frictions that Caused the Subprime Crisis -- References -- VIII. Policy Panel: Where to From Here? -- Where to From Here?: Lessons for Research, Policy and the Industry Philipp Hartmann, European Central Bank -- References.
Tarp Version 1: A Turning Point in Crisis Management Richard J. Herring, The Wharton School, University of Pennsylvania.
Summary: Key Features:Contributors are from a wide range of countries and affiliations, spanning both the public and private sectors, including senior well-known academics, bank regulators, financial policy-makers, bankers, and trade association staff, with diverse experiences and views.
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Intro -- Contents -- Preface -- Acknowledgements -- I. Special Addresses -- Central Banks and the Financial Turmoil José Manuel González-Páramo, European Central Bank -- 1. Introduction1 -- 2. The Separation Between Monetary Policy Formulation and its Implementation -- 3. The Impact of the Turmoil on the Monetary Transmission Mechanism -- 4. The Role of Uncertainty -- 5. Conclusion -- The Implications of the Credit Crisis for Public Policy Charles H. Dallara, Institute of International Finance -- Where Are Our Leaders? Kenneth W. Dam, University of Chicago -- Trust and Financial Markets Paola Sapienza, Northwestern University -- 1. Trust and Finance -- 2. Does It Matter Who You Trust? -- 3. What Determines Trust? -- 4. Trust and Regulation -- References -- II. What Happened, Where? -- A View of the U.S. Subprime Crisis Robert DiClemente, Citigroup, and Kermit Schoenholtz, New York University -- 1. Introduction -- 2. The Setting -- 3. The Policy Response -- 4. The Role of Financial Conditions -- 5. Where Do We Go from Here? -- References -- What Has Happened in Europe? Monetary Policy, Lending Cycles, Banking Competition, Risk-Taking, and Regulation Jesús Saurina, Banco de España -- 1. Introduction -- 2. What Has Happened in Europe? -- 3. Why Has It Happened? Some Potential Explanations -- 3.1 Competition and risk-taking -- 3.2 Monetary policy and risk-taking -- 3.3 Lending standards -- 4. What Can Be Done? Countercyclical Regulation -- 5. Lessons for Bank Regulation/Supervision -- 6. Conclusion -- References -- The Subprime Crisis Effects in the Rest of the World Laura E. Kodres, International Monetary Fund -- 1. Before and Now -- 2. Why? -- 3. Who? Linkages Known and Unknown -- 4. What's Next? -- 5. What Can Anyone Do about It? -- III. How Serious is the Damage?.

Bank Failures: The Limitations of Risk Modeling Patrick Honohan, Trinity College and Center for Economic Policy Research -- 1. Introduction and Summary -- 2. Four Failure Categories -- 2.1 Case A: "Diversified survivor" - UBS -- 2.2 Case B: "Ruined gambler" - Sachsen Landesbank -- 2.3 Case C: "Too opaque to survive in the market" - Northern Rock -- 2.4 Case D: "Overleveraged mortgage lender" - The GSEs -- 3. Conclusion -- References -- Comments: How Serious is the Damage? Christopher Kent, Reserve Bank of Australia -- 1. Overview - Lessons from Australia's History of Financial Turmoil -- 2. Patrick Honohan - Bank Failures: The Limitations of Risk Modelling -- 3. David Greenlaw - Costs for the Real Economy of Balance Sheet Problems -- 4. S. "Vish" Viswanathan - Damage to Financial Markets -- 5. Concluding Remarks -- References -- IV. Why did It Go Undetected/Underestimated for So Long? -- Cliff Risk and the Credit Crisis Joseph R. Mason, Louisiana State University -- 1. Introduction -- 2. How to Post Record Profits with Negative Cash Flows -- 3. How to "Sell" Without Transferring Responsibility -- 4. Without Risk Transfer There Can be No True Sale -- 5. Summary and Conclusion: Everything Old is New Again -- References -- The Credit Crunch of 2007: What Went Wrong? Why? What Lessons Can be Learned? John C. Hull, University of Toronto, Canada -- Abstract -- 1. Introduction -- 2. The U.S. Housing Market -- 3. Securitization -- 4. Lessons -- 4.1 Agency costs: Originators and investors -- 4.2 Agency costs: Financial institutions and their employees -- 4.3 Transparency -- 4.4 The need for models -- 4.5 How models should be used -- 5. Conclusions -- References -- Overdependence on Credit Ratings was a Primary Cause of the Crisis Frank Partnoy, University of San Diego School of Law -- 1. Introduction.

2. Some Background and Theory: Reputation versus Regulatory Licenses -- 3. The Growth of "Second-Level" Mortgage Securitization -- 4. Credit Ratings as Drivers of Second-Level Securitizations -- 5. Regulatory versus Behavioral Overdependence -- 6. Some Policy Prescriptions -- 7. Conclusion -- V. Experience with Crisis Management -- Liquidity Management Under Market Turmoil: Experience of the European Central Bank in the First Year of the 2007-2008 Financial Market Crisis Nuno Cassola, Cornelia Holthausen and Flemming Würtz, European Central Bank -- 1. Introduction -- 2. ECB Liquidity Management Under Normal Market Conditions -- 2.1 Last day of the reserve maintenance period -- 2.2 Before the last day of the reserve maintenance period -- 3. ECB Liquidity Management Under Turbulent Market Conditions -- 3.1 Automatic stabilizers -- 3.1.1 Counterparties and size of operations -- 3.1.2 Reserve requirements -- 3.1.3 Eligible assets -- 3.1.4 Marginal lending facility -- 3.2 Liquidity management -- 3.2.1 Fixed rate tenders with full allotment -- 3.2.2 The separation principle -- 3.2.3 Frontloading -- 3.2.4 Narrow corridor with large surplus -- 3.2.5 Lengthening the maturity structure of refinancing and the term auction facility -- 4. An Overall Assessment of the Liquidity Policy -- 4.1 Short-term interest rates before and during the turmoil -- 4.2 Recourse to standing facilities -- 4.3 Limits to the current frontloading policy -- 5. Conclusions and Open Issues -- References -- Crisis Management and Financial Stability: Some Lessons from the United Kingdom Nigel Jenkinson, Bank of England -- 1. Introduction -- 2. Northern Rock -- 3. Liquidity Risk Management and Supervision -- 4. Deposit Insurance -- 5. Bank Resolution -- 6. Central Bank Operations -- 7. Strengthening Future System Resilience -- References.

VI. Implications for Basel II and Bank Capital Regulation -- Risk Management Failures During the Financial Crisis Michel Crouhy, NATIXIS Corporate and Investment Bank -- 1. Introduction -- 1.1 Information problems -- 1.2 Liquidity problems -- 2. What Went Wrong in Risk Management and Risk Modeling -- 2.1 Over-reliance on misleading ratings from rating agencies -- 2.1.1 "Cliff" effects or nonlinearities in the risk of subprime CDO tranches -- 2.1.2 Wrong estimates of default rates and default correlations13 -- 2.1.3 Sensitivities of the rating of senior subprime CDO tranches to estimation errors of delinquency rates, recovery rates and default correlations -- 2.2 Over-reliance on unrealistically simple risk models -- 2.3 Over-reliance on inaccurate data -- 2.4 Over-reliance on short-term financing with too little consideration for liquidity risk -- 3. Lessons From This Fiasco -- 3.1 Differentiate the ratings of corporate bonds and structured credit products -- 3.2 Check the quality of the data about the underlying assets and make sure it is complete and timely -- 3.3 Complement the traditional VaR risk measure with worst-case scenario analysis and stress testing -- References -- A Supervisor's View of the Current Financial Turmoil Cathy Lemieux and Steven VanBever, Federal Reserve Bank of Chicago -- References -- The Subprime Crisis: Lessons About Market Discipline Mark J. Flannery, University of Florida -- 1. The Crisis -- 1.1 What happened? -- 1.2 Why did it happen? -- 1.2.1 Underwriters -- 1.2.2 Investors -- 1.2.3 Rating agencies -- 2. What is "Market Discipline"?6 -- 3. Viewing Market Discipline Through a Subprime Lens -- 3.1 Lessons about market monitoring -- 3.2 Lessons about market influence -- 3.2.1 Agency and incentive problems -- 3.2.2 Raising capital -- 3.2.3 Lessons about rating agencies -- 3.2.4 Summary -- 4. Where Should We Go From Here?.

5. Summary -- References -- Comments: Implications for Bank Capital Standards/Regulation Robert E. Litan, The Kauffman Foundation and The Brookings Institution -- VII. Implications for Regulation of Financial Markets and Instruments -- Implications of the Crisis for Regulation Mark Carey, Board of Governors of the Federal Reserve System -- 1. Introduction -- 2. Not Financial Engineering -- 3. Not Bad Risk-Management Models -- 4. Not Subprime Mortgage-Related Credit Losses -- 5. Not Inadequate Capitalization of Banks -- 6. Not Inept Prudential Supervision -- 7. Not Moral Hazard from the Safety Net -- 8. Asymmetric Financial Services Industry Compensation Profiles Did Contribute to the Crisis -- 9. An Incomplete Regulatory Model Did Contribute to the Crisis -- 10. Ways Forward -- 11. Concluding Remarks -- References -- The Seven Deadly Frictions of Subprime Mortgage Credit Securitization Adam B. Ashcraft and Til Schuermann, Federal Reserve Bank of New York -- 1. Frictions Between the Mortgagor and Originator: Predatory Lending -- 2. Frictions Between the Originator and the Arranger: Predatory Lending and Borrowing -- 3. Frictions Between the Arranger and Third Parties: Adverse Selection -- 3.1 Adverse selection and the warehouse lender -- 3.2 Adverse selection and the asset manager -- 3.3 Adverse selection and credit rating agencies -- 4. Frictions Between the Servicer and the Mortgagor: Moral Hazard -- 5. Frictions Between the Servicer and Third Parties: Moral Hazard -- 6. Frictions Between the Asset Manager and Investor: Principal-Agent -- 7. Frictions Between the Investor and the Credit Rating Agencies: Model Error -- 8. Five Frictions that Caused the Subprime Crisis -- References -- VIII. Policy Panel: Where to From Here? -- Where to From Here?: Lessons for Research, Policy and the Industry Philipp Hartmann, European Central Bank -- References.

Tarp Version 1: A Turning Point in Crisis Management Richard J. Herring, The Wharton School, University of Pennsylvania.

Key Features:Contributors are from a wide range of countries and affiliations, spanning both the public and private sectors, including senior well-known academics, bank regulators, financial policy-makers, bankers, and trade association staff, with diverse experiences and views.

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Electronic reproduction. Ann Arbor, Michigan : ProQuest Ebook Central, 2018. Available via World Wide Web. Access may be limited to ProQuest Ebook Central affiliated libraries.

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