Transcript The financial crisis: Causes, consequences and remedies

De bankcrisis:
Oorzaken, gevolgen en oplossingen
Paul De Grauwe
Oorzaken
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Essentie van bankieren
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Banken “borrow short and lend long”
Dit creëert grote broosheid
Geen probleem in normale tijden
wanneer mensen vertrouwen hebben
Probleem ontstaat als vertrouwen zoek
is
Dit kan gebeuren als één of meer
banken solvabiliteitsproblemen kennen
(voorbeeld: slechte leningen )
Oorzaken
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Dan is een “bank run” mogelijk:
liquiditeitscrisis
Sleept ook andere “onschuldige” banken mee
Er ontstaat een duivelse interactie tussen
liquiditeits- en solvabiliteitscrisis: solvabele
banken moeten activa verkopen om
terugtrekken van deposito’s op te vangen
Deze verkopen doen prijzen activa dalen
Waarde van de activa van de banken daalt
solvabiliteitsprobleem
En nieuwe liquiditeitscrisis
Oorzaken
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De bankcrisis van de jaren Dertig en
de Grote Depressie hadden geleid to
hervormingen die de banksector
minder broos moesten maken
Deze zijn
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Centrale bank als “lender of last resort”
Deposito verzekering
Splitsing commerciële- en zakenbanken
(Glass-Steagall Act 1933)
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Meeste economen dachten dat dit
zou volstaan om veiligheid in te
bouwen in bankstelsel
En om grote bankcrisis onmogelijk
te maken
Dat was dus niet zo
Waarom?
Laten we eerst begrip “Moral
Hazard” introduceren
Moral Hazard
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De verzekering die impliciet geboden
wordt door centrale banken en overheden
heeft een sterke prikkel gegeven aan
bankiers om meer risico te nemen.
Om dit tegen te gaan hebben overheden
banken onderworpen aan toezicht en
controle
gedurende de naoorlogse periode
Maar dan gebeurde iets merkwaardigs.
Het nieuwe paradigma van de
efficiënte markten
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Het paradigma werd erg populair ook
buiten academische ivoren toren
Belangrijkste ingrediënten:
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Prijzen weerspiegelen fundamentele waarden;
dus zeepbellen kunen niet ontstaan
Financiële markten kunnen zichzelf reguleren;
er is geen overheidsregulering nodig
Bankiers waren entousiast
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Paradigma van efficiënte markten
was erg invloedrijk
Bankiers gebruikten het om te
pleiten voor deregulering
Ze haalden hun slag thuis
Banken in VS en Europa werden
geleidelijk gedereguleerd
Hoogtepunt van deregulering:
Afschaffing van Glass-Steagall act in
1999 (Clinton-Rubin-Summers)
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Banken konden nu alle activiteiten,
traditioneel gereserveerd voor
zakenbanken, opnemen
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Underwriting en beleggen in aandelen en
derivaten en nieuwe financiële producten
met hoog risico
De les van de Grote Depressie was
vergeten
Andere factor: financiële innovaties
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Deregulering van financiële markten viel
samen met
proces van financiële innovatie
En werd er ook door versterkt
Financiële innovatie bracht nieuwe
financiële producten
die toelieten traditionele leningen te
verpakken in verschillende risico-klassen
en te verkopen in de markt
“Securisering” (“securitisation”)
Andere factor: financiële innovaties
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Men dacht dat deze complexe
producten het risico zouden
spreiden over meer actoren
(efficiënte marktidee)
met minder systeemrisico tot gevolg
En dus minder noodzaak voor
toezicht en regulering
De markt zou zichzelf wel reguleren
Zijn financiële markten wel efficiënt?
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De te verwachten wonderen van
deregulering waren gebaseerd op
het bestaan van efficiënte markten
Zijn die wel efficiënt?
Antwoord: zeepbellen en
ineenstortingen (“Bubbles and
crashes”) maken inherent deel uit
van kapitalisme
Stock market indices in euro area (Euro-Stoxx-50)
and in the US (S&P-500) in 2003-08
200
180
160
140
120
100
euro area
US
2008Se
2008Ma
2008Jan
2007Se
2007Ma
2007Jan
2006Se
2006Ma
2006Jan
2005Se
2005Ma
2005Jan
2004Se
2004Ma
2004Jan
2003Se
2003Ma
2003Jan
80
Nasdaq :similar story
Vastgoedmarkt in de VS
240,00
US house prices
S&P Case-Shiller Home Price index
220,00
200,00
180,00
160,00
140,00
120,00
100,00
ja
n/
00
ju
l/ 0
ja 0
n/
01
ju
l/ 0
1
ja
n/
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ju
l/ 0
ja 2
n/
03
ju
l/ 0
ja 3
n/
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ju
l/ 0
ja 4
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ju
l/ 0
ja 5
n/
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ju
l/ 0
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ja
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ju
l/ 0
ja 7
n/
08
ju
l/ 0
8
80,00
DEM-USD 1980-87
3.3
wisselmarkten
2.8
2.3
1.8
Euro-dollar rate 1995-2004
1,3
1.3
1987
1986
1985
1984
1983
1982
1981
1980
1,2
1,1
1
0,9
0,8
0,7
0,6
6/03/95
6/03/96
6/03/97
6/03/98
6/03/99
6/03/00
6/03/01
6/03/02
6/03/03
6/03/04
“Bubbles and crashes” zullen niet
verdwijnen
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“Bubbles and crashes” zijn het resultaat
van grote onzekerheid
Beleggers zijn genoodzaakt gebruik te
maken van “heuristics”.
Voorbeeld: koop als prijs stijgt
Of koop als “goeroe” het zegt
dit leidt tot kuddegeest
Kindleberger, Manias, Panics and Crashes:
bubbles and crashes hebben bestaan
sinds het begin van kapitalisme
en zullen niet verdwijnen
Banken surfen op bewegingen van
financiële markten
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Ten gevolge van deregulering konden
banken het hele gamma van financiële
producten aanhouden
Ze werden dus meegesleurd door de
grote speculatieve bewegingen
Hun balansen werden hypergevoelig
voor de zeepbellen (hi-tech zeepbel,
immobiliën zeepbel,
grondstoffenzeepbel)
Bankbalansen kenden inflatie
Growth rate of total bank loans (left) and
Stock price index(right) in euro area
14%
200
180
12%
160
140
index
% change
10%
8%
120
6%
100
Loans
4%
Stock price
2%
2003Jan
80
60
2004Jan
2005Jan
2006Jan
2007Jan
2008Jan
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Het omgekeerde is ook waar
De balansen van de banken werden
ook heel gevoelig voor de crash.
De trigger was de crash in de
huizenmarkt in de VS
Dit was slechts een trigger
De crisis zou in elk geval ontstaan
zijn
Additional developments:
regulatory arbitrage
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Basle I was an attempt to impose
similar capital ratios in all developed
countries’ banks
It was based on a classification of
assets according to risk
and to force banks to set capital
aside against these assets based on
the risk
Regulatory arbitrage: case 1
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Basle I put a low risk weight on loans by banks to
other financial institutions
This gave incentives to bank to transfer risky assets
(e.g. structured products) with high risk weight off
their balance sheets
in special conduits to which they extended shortterm credit
Banks were doing favour to each other
As a result increasingly banks obtained their
funding through the interbank (wholesale) market
which is not insured by government
High leverage
Total assets to deposits
4,5
4
3,5
3
2,5
2
1,5
1
0,5
0
Belgium
France
Germany
Italy
Netherlands
Spain
UK
US
Eurozone
Regulatory arbitrage: case 2
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Basle I made it possible for banks
to treat assets that are insured as
government securities, i.e. zero risk
weight
This led to explosion of CDS (credit
default swaps)
Created the illusion in banking
system that the assets on their
balance sheets had low risk
This turned out to be wrong. Why?
Private insurance does not insure
against tail risk very well
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Financial models used to price CDS (but
also other financial products, e.g.
derivatives) are based on normal
distribution of returns
There is one general feature in all financial
markets: returns are not normally
distributed
Returns have fat tails (bubbles and
crashes)
Implication: models based on normal
distribution dramatically underestimate
probability of large shocks
02-10-2006
02-10-2003
02-10-2000
02-10-1997
02-10-1994
02-10-1991
02-10-1988
02-10-1985
02-10-1982
02-10-1979
02-10-1976
02-10-1973
02-10-1970
02-10-1967
02-10-1964
02-10-1961
02-10-2006
02-10-2003
02-10-2000
02-10-1997
02-10-1994
02-10-1991
02-10-1988
02-10-1985
02-10-1982
02-10-1979
02-10-1976
02-10-1973
02-10-1970
02-10-1967
02-10-1964
02-10-1961
02-10-1958
02-10-1955
02-10-1952
02-10-1949
02-10-1946
02-10-1943
02-10-1940
02-10-1937
02-10-1934
02-10-1931
-0,25
02-10-1958
02-10-1955
02-10-1952
02-10-1949
02-10-1946
02-10-1943
02-10-1940
02-10-1937
02-10-1934
02-10-1931
0,1
02-10-1928
-0,3
0,15
02-10-1928
Example: stock market (DJ)
Dow Jones Industrial Average 1928-2008
0,15
0,1
0,05
0
-0,05
-0,1
-0,15
-0,2
Random normal process
Changes that are higher
than 5 standard
deviations occur once
every 7000 years if
returns are normally
distributed
0,05
0
-0,05
-0,1
-0,15
-0,2
-0,25
-0,3
During the last 80 years
there were 76 such
changes
What should we
conclude?
Was last October exceptional?
Yes, if you have studied finance theory and believe
returns are normally distributed
TABLE : Five Largest Movements of the Dow-Jones Industrial Average in October 2008
An non-Normal October (1)
Date
07/10/2008
09/10/2008
13/10/2008
15/10/2008
28/10/2008
Log-Return
- 0.05242
- 0.07616
+ 0.105083
- 0.08201
+ 0.103259
Average Frequency under Normal Law
Once in 8,038 Years
Once in 9,114,869,772 Years
Once in 165,017,584,680,094,000,000 (2) Years
Once in 597,973,260,906 Years
Once in 29,955,839,072,867,400,000 (2) Years
(1) Daily returns from 01/01/1971 – 31/10/2008 (= 0.03%,  = 1.06%)
(2) 10 18 = “Quintillion” in Western (Arabic) Numeral
= “Billion Billion” in US; modern British & Australian
No if you have not studied finance theory
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As a result, there is systematic underpricing of
risk (tail risk) creating a perception of low-risk
environment
In addition, there were no incentives to price
this tail risk because there was implicit
expectation that if something very bad would
happen, e.g. a liquidity crisis (a typical tail risk)
central banks would provide the liquidities
This created the perception in banks that
liquidity risk was not something to worry about.
Samengevat
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Deregulering,
Afwezigheid van voldoende toezicht
Het toepassen van een foute theorie
Financële innovaties (securitisation)
Moral hazard
Bracht banken ertoe ongehoorde
risico’s aan te gaan
De balansen waren vervlochten met
de zeepbelbewegingen in de markten
En ontploften als de markten crashten.
The reaction of the authorities:
central banks
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Learning by doing:
Massive liquidity provision by
central banks,
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Provided the necessary liquidity and
prevented liquidity crisis from bringing
down the whole system
But they also stretched balance sheets
of central banks
The reaction of the authorities:
governments
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Government guarantees on
interbank deposits were essential in
preventing freezing of interbank
market from leading to large scale
liquidity crisis
But are they credible?
But are they credible?
Total assets to GDP
600
500
400
300
200
100
0
Belgium
France
Germany
Italy
Netherlands
Spain
UK
US
Eurozone
The reaction of the authorities:
governments
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Recapitalization of banks :They
have been massive
Together with the previous
interventions, these have been
successful up to now in averting a
bank collapse
but it is unclear whether they will
be sufficient to avert future crises
and to bring the banking system
back on track so that it can perform
its function of credit creation
Fundamental problem banks face today
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balance sheets are massively inflated
because of their participation in
consecutive bubbles.
banks face a period during which their
balance sheets will shrink substantially
(“deleveraging”).
This process is will not be a smooth
one
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mainly because during the shrinking
the devilish interaction of solvency
and liquidity crises will occur.
This is likely to create a further
downward spiral.
As a result, there is as yet no floor
on the value of the banks’ assets.
Governments will be called upon
again to recapitalize
And nationalize banks
It’s not yet over
Worse to come
Deleveraging
will
give
strong
incentives to banks not to extend
new loans,
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thereby dragging down the real
economy.
How far and how long this will go,
nobody knows.
It is not inconceivable that this leads to
a long and protracted downward
movement in economic activity.
What can be done: short run
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A return of Keynesian economics.
Governments will be forced to sustain
demand in the face of dwindling tax
revenue
Thus massive budget deficits are likely
and desirable
Attempts at balancing government
budgets would not work, as it would
likely lead to Keynes’ savings paradox.
What can be done: short run
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In the process of recapitalizing
banks, governments will substitute
private debt for government debt.
This also is inevitable and desirable.
As agents distrust private debt they
turn to government debt deemed
safer.
Governments will have to
accommodate for this desire. (See
Hyman Minsky (1986) on this)
What can be done: short run
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Governments and central banks will
also have to support asset prices, in
particular stock prices
by buying assets
Recapitalizing banks is clearly
insufficient to stop the liquiditysolvency spiral.
Long-term reform
Back to narrow banking
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We have to go back to narrow banking
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Strict separation of commercial and
investment banking
The classes of assets in which banks can
invest must be limited
No securitization anymore
Higher liquidity ratios
And less leverage
Alternative of Basle II does not work
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Investment banks can do all the
sophisticated asset creation and
management
but must fund these through the
capital market with liabilities of
same maturity.
No short-term funding possible
No funding through commercial
banks
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Banking will become much less
profitable
but less risky
bankers will scream
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International coordination at setting
new rules will be necessary
Otherwise race to the bottom
leading to new deregulation
International coordination of rule
setting is most challenging