1. International finance 120181-1165 The financial crisis 2007-2009

2. International finance 120181-1165 Lecture outline  Definitions  The origins of the crisis  Possible explanations of the crisis- empirical evidence  Preventing financial crises

3. International finance 120181-1165 Financial crisis- definition  Powerful shocks within the financial system which trigger a decrease or a deepening of the already ongoing production decrease

4. International finance 120181-1165 Stock market crunches  Rational expectations  Growing productivity- assumptions  Behavioral finance

5. International finance 120181-1165 Stock market crunches  The source of speculative purchases  Loans- payback constraints  Influence on domestic demand

6. International finance 120181-1165 Speculative bubbles  Growing deviation of the present values of prices/ER from their theoretical values till the moment of price collapse

7. International finance 120181-1165 Banking crises  The willingness of banks to grant loans  Information concerning the situation of enterprises  Moral hazard  Negative selection of the borrowers

8. International finance 120181-1165 Banking crises  „Toxic debt”  The solvency of the banks  Financial accelerator  Credit amount expansion

9. International finance 120181-1165 Currency crises  Will the CB be able to maintain the ER?  3 generations of currency crises  1 generation- Krugman  2 generation- Obstfeld  3 generation- eclectic model

10. International finance 120181-1165 Currency crises  Banking supervision  Official foreign reserves shifts  The development of financial markets

11. International finance 120181-1165 Speculative attacks  Speculation against fixed ER  The mechanism of the attack  The consequences of the attack  Example: speculative attack on GBP in 1992

12. International finance 120181-1165 The origins of the crisis 2007-2009  Excessive CA deficit in the USA  Twin deficits in the USA  Issuance of governement bonds- main purchaser- China

13. International finance 120181-1165 The origins of the crisis 2007-2009  Expansionary monetary policy of the FED  Law level of i%  Low credit costs

14. International finance 120181-1165 Expansionary monetary policy of the FED

15. International finance 120181-1165 The origins of the crisis 2007-2009  Petrodollars as a source of global liquidity  Supply shocks on the oil market  Inflationary impulses  i% increase  difficulties to pay back loans  Decrease of real estate prices

16. International finance 120181-1165 The origins of the crisis 2007-2009  Speculative bubble on the US housing market

17. International finance 120181-1165 The origins of the crisis 2007-2009  International banking deregulation  Non- banking institutions- no regulation  Subprime loans  Adjustable rate mortgages  Mortgage backed securities  CDO  Credit risk swap

18. International finance 120181-1165 The origins of the crisis 2007-2009  Financial innovations  Leverages  New risk management techniques

19. International finance 120181-1165 The origins of the crisis 2007-2009  The collapse of the bubble  immediate real estate prices decrease  Large losses in the financial sector  Housing market crunch  banking crisis  economic crisis

20. International finance 120181-1165 The origins of the crisis 2007-2009  Credibility crisis on the banking market  Liquidity crisis  Insolvency menace of numerous institutions  FED rescue plans

21. International finance 120181-1165 The origins of the crisis 2007-2009  Global unequilibrium  Financing US investments from foreign savings  global financial crisis

22. International finance 120181-1165 The effects of the crises  Decrease of i% by many CB  CB actions coordination- market signaling  Expansion of the crisis into the real economy

23. International finance 120181-1165 The effects of the crises  The spread between LIBOR and the FED reference i%  Paulson plan  Rescue plans in Europe

24. International finance 120181-1165 From stock market crunch to debt crisis  Reinhart, Rogoff 2010  Debt as a signal of banking crises  Governements fuelling credit booms  Banking crises as a signal of debt crises  Hidden debt as accelerator

25. International finance 120181-1165 The governement’s and CB’s actions  Taylor 2009  The expansionary monetary policy of the FED as the main reason for the crisis  Global saving glut ???  What prolonged the crisis?

26. International finance 120181-1165 „No boom no bust” Source: Taylor, op. cit

27. International finance 120181-1165 Global saving glut??? Source: Taylor, op. cit

28. International finance 120181-1165 What prolonged the crisis?  Lack of liquidity?  Credibility crisis?  Risk premium explaning the spread between LIBOR and the reference i%

29. International finance 120181-1165 The excessive/insufficient regulation paradox  Aizenman 2009  Regulation thresholds  Dependence of the regulation strictness on the length of the period without a crisis  Regulatory behaviour  2 paradoxes

30. International finance 120181-1165 The excessive/insufficient regulation paradox  Possible solutions  Information disclosure  Independence of regulatory authorities  Regulation centralization  Global standards

31. International finance 120181-1165 Early warning indicators  Frankel,Saravelos (2010)  Explainig the crises with several economic values fluctuations  Past ER developments  The level of foreign reserves

32. International finance 120181-1165 Behavioral finance  Szyszka (2009)  An alternative approach to financial markets analysis  Mistakes of market participants  Psychological aspect

33. International finance 120181-1165 Behavioral finance  Gready investors  Risk underestimation  Herding  Limited rationality  Mistakes of rating agencies

34. International finance 120181-1165 Preventing financial crises  Preventing the occurence of bubbles  Preventing banking crises  Preventing currency crises

35. International finance 120181-1165 Summing up  The definitions and elements of the financial crisis  The origins of the fiancial crisis 2007-2009  The role of the governements, CB and regulatory authorities  Changes in financial supervision

36. International finance 120181-1165 Summing up  Behavioral approach to the crisis  Financial market psychology  Preventing crises

37. International finance 120181-1165 References  A. Sławiński, Rynki finansowe, PWE, Warszawa 2006  P. Krugman, M.Obstfeld, International economics: theory and policy, Pearson, Addison Wesley, Boston 2009,  J. A. Frankel, G. Saravelos, Are Leading Indicators of Financial Crises Useful for Assessing Country Vulnerability? Evidence from the 2008-09 Global Crisis, NBER Working Paper No. 16047, Cambridge 2010,  J. Aizenman, Financial Crisis and the Paradox of Under- and Over-Regulation, NBER Working Paper No. 15018, Cambridge 2009,  J. B. Taylor, The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong, NBER Working Paper No. 14631, Cambridge 2009,  C. M. Reinhart, K. S. Rogoff, From Financial Crash to Debt Crisis, NBER Working Paper No. 15795, Cambridge 2010  A. Szyszka, Behawioralne aspekty kryzysu finansowego, Bank i Kredyt 40 (4), Warszawa 2009