Documente Academic
Documente Profesional
Documente Cultură
Module 3: FINANCE
Dr Elisabetta Bertero
Readings:
2014 - Page 1
Bank of England, Financial Stability Report, October 2008, pp. 7-9 (the rest, optional)
2014 - Page 2
Mid-1980s to mid-2000s
- Liberalisation and globalisation of capital flows in
the last decades
- Development of new financial instruments and
banking model
- Lighter financial regulatory regime and shadow
banking
2014 - Page 3
2014 - Page 4
global imbalances
Low savings rates in the US and high in Asian
countries
Large US current account deficit, large external
debt and weak dollar
Sources: Bank of England, Financial Stability report, October 2008 [Original sources: ONS, Thomson
Datastream and Bank calculations]
(a) Five-year rolling average of annualised volatility of quarter-on-quarter growth rate. 2008 data are to
Q2.
AC100 Module 2: Finance - Dr Elisabetta Bertero -
2014 - Page 5
2014 - Page 6
Resulting in:
- Historically-low US interest rates and low inflation
- Rising US house prices and stock prices (bubble)
2014 - Page 7
2014 - Page 8
Sources: Bank of England, Thomson Datastream and Bank calculations. Data include the value of loans that have been securitised.
2014 - Page 9
2014 - Page 10
Consequences
- Leverage to obtain higher returns and greater
dependence on overseas funding
- Reckless lending (US sub-prime mortgages)
- Excessive risk taking
- Securitisation and mispricing of risk
- Inaccurate ratings by credit rating agencies
Sources: Bank of England, Dealogic, ONS, published accounts and Bank calculations.
(a) Customer funding gap is customer lending less customer funding, where customer refers to all non-bank borrowers and depositors.
(b) Data exclude Nationwide.
(c) UK household savings as a percentage of post-tax income.
2014 - Page 11
2014 - Page 12
No documentation
Teaser rates
2014 - Page 13
2014 - Page 14
2014 - Page 15
2014 - Page 16
2014 - Page 17
2014 - Page 18
2014 - Page 19
2014 - Page 20
Sources: Bank of England, Financial Stability Report, October 2008 (sources: Bank of England, Bloomberg, Chicago Board Options Exchange, Debt
Management Office, London Stock Exchange, Merrill Lynch, Thomson Datastream and Bank calculations)
(a) The liquidity index shows the number of standard deviations from the mean. It is a simple unweighted average of nine liquidity measures,
normalised on the period 19992004. The series shown is an exponentially weighted moving average. The indicator is more reliable after 1997
as it is based on a greater number of underlying measures. The recent fall in the indicator is largely due to a sharp decline in the interbank
market liquidity measure.
2014 - Page 21
September:
- Fannie Mae and Freddie Mac effectively nationalised
- Lehman Bro defaults and is not rescued
- Merrill Lynch defaults and is bought by Bank of America
Source: Bank of England, Fin Stability Report, October 2007 (Bloomberg and Bank
calculations)
(a) Three-month sterling-Libor spread over sterling over overnight index average swap rate.
Dotted lines show three-month forward spreads. Spreads are a measure of risk premium
perceived by markets.
AC100 Module 2: Finance - Dr Elisabetta Bertero -
2014 - Page 22
1. 2007 financial crisis: it originated in the private sector, but the cost of the
solution (bail-out of banks) was borne by many countries governments and
ultimately taxpayers (e.g. Iceland and UK) , with severe consequences
particularly for some EMU countries (Ireland and Spain)
2. Greece (2-3% of EMUs GDP): free rider of EMU + false statistics - enjoyed
benefits of low interest rates but did not introduce necessary structural changes
high government deficit + low savings solutions and contagion
Hence: PIGS acronym misleading
3. Structural unresolved fiscal issue/political union within EMU
2014 - Page 23
2014 - Page 24
Source: M. Wolf, Why the Eurozone will suvive, FT 8 March 2011 See AC100 Moodle page
2014 - Page 25
2014 - Page 26
1.
2.
3.
4.
5.
6.
5. Providing information
6. Dealing with incentive problems
2014 - Page 27
2014 - Page 28
Banks
Deficit Units
Borrowers
2014 - Page 29
Other financial
institution
Creation of new
markets
Other financial
institution
Creation of new
markets
2014 - Page 30
Other financial
institution
Creation of new
markets
Surplus Units,
Deficit Units
Households
Depositors
Households
Mortgage holders
These are called collateralised debt obligations (CDOs), assetbacked securities, mortgage-backed securities, mortgage bonds
These assets are often sold and traded within the shadow banking
system
AC100 Module 3: Finance - Dr Elisabetta Bertero -
2014 - Page 31
Intermediaries
e.g. banks
AC100 Module 3: Finance - Dr Elisabetta Bertero -
2014 - Page 32
2014 - Page 33
Yield Spreads
US
Treasury
Bills
2 years
Yield
Spread
Definition:
Corporate High
Quality (AAA)
4.71%
Corporate
Medium Quality
(A)
4.85%
5.22%
16 basis points
51 basis points
2 years
Yield
Spread
Definition:
Source: www.bondsoline.comw.bondsonline.com
US
Treasury
Bills
Corporate High
Quality (AAA)
1.06
2014 - Page 34
Corporate
Medium Quality
(A)
5.37
6.82
Source: www.bondsoline.comw.bondsonline.com
2014 - Page 35
2014 - Page 36