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The financial crisis: some facts, some
responsibilities, some ways out?
Ignazio Visco
Banca dItalia
NFA, Firenze30 June 2009
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Structural changes
Integration of economies and markets Technological and financial innovation
Demographic trends
Macro framework
High rates of growth of the world economy Low inflation rates
Imbalances Saving rates, current accounts, net foreign positions
Global liquidity, asset prices, volatility
Financial framework Financial intermediaries, securitization, structured products
Investment strategies, risk management
Some facts
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National savings and investment of selected countries and country groups
(in percent of GDP)
United States
12
14
16
18
20
22
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
National Saving National Investment
Euro area
19
20
21
22
23
24
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
National Saving National Investment
Japan
22
24
26
28
30
32
34
36
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
National Saving National Investment
China
30
35
40
45
50
55
60
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
National Saving National Investment
Em. Asia exc. China
22
24
26
28
30
32
34
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
National Saving National Investment
Oil exporters
15
20
25
30
35
40
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
National Saving National Investment
Source: IMF, World economic
outlook, April 2009.
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Some responsibilities
Economic agents: wrong incentives?
Budget constraints
Planning horizons
Policymakers: political cycles and ideology?
Macroeconomic (MP and FIT; Fiscal policy)
Regulatory and supervision (Light touch; Basel 1 and 2)
Economic theories and models: rational behaviour?
Macro: nmc, rbc, nke (DSGE) Finance: apt, risk (mark to market, rating)
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Ways out?
Macro-policies
Monetary policy, liquidity mopping out Fiscal policy, exit from public debts
Macro-prudential policy?
Global macro surveillance (G-20, IMF: IMS?)
Financial regulation
FSB (perimeter, markets, products, intermediaries)
Basel process
Economics
Behavioural theories?
Econometric models
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Further details
Post-Lehman
Forecasting
Policy responses
Open Issues
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Stages of the crisis: pre and post Lehman
Before Lehman
Liquidity risk
Inflation risk
Recourse to markets,
central banks Advanced economies
crisis
After Lehman
Credit risks
Deflation risks
Government interventions
Emerging economies crisis
Onset of the crisis
(9 August 2007)
Default of Lehman Brothers: confidence
crisis
15 September 2008
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Some relevant facts: a confidence crisis (1)
Large banks:Losses and recapitalizations
(billion dollars)
Source: Bloomberg.
0
50
100
150
200
250
300
350
400
Dec-2006 Dec-2007 Dec-2008 Dec-2009
0
50
100
150
200
250
300
350
400
Euro
US Dollar
British Pound
Interest rate spread
between three-month interbank
loans with and without collateral
0
50100
150
200
250
300
350
400
450
2007 Q3
or
earlier
2007 Q4 2008 Q1 2008 Q2 2008 Q3 2008 Q4 2009 Q1
losses stock issues
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Some relevant facts: a confidence crisis (2)
Banks: stock price indices(end of June 2007=100)
Banks: CDSpremia (1)(basis points)
(1) Simple averages. Investment banks not included.
0
50
100
150
200
250
300
350
Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09
US
UK
France
Switz
Italy
Source: Bloomberg. Source: Datastream.
010
20
30
40
50
60
7080
90
100
110
Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09
US
Euro area
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Some relevant facts:
transmission to the real economy (1)
United States Japan United Kingdom
average range average range average range
2009 -2.9 [-3.9;-2.1] -6.1 [-8.1;-1.2] -3.8 [-4.5;-3.1]
2010 1.8 [-0.3;3.8] 1.3 [-0.1;4.2] 0.3 [-1.0;2.0]
GDP growth forecasts for the US, UK and Japan
Source: Consensus Forecasts (May 11, 2009).
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Some relevant facts:
transmission to the real economy (2)
-coin
GDP growth forecasts for the euro area
Consensus Forecasts
Source: Banca dItaliaSource: Consensus Forecasts
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Some relevant facts: repercussions on
inflation
United States Euro Area
Source: Survey of Professional Forecasters Source: Consensus Forecasts.
Consumer price inflation forecasts
1
1.5
2
2.5
3
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
1 year ahead inflation forecast
10 years ahead inflation forecast
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A credit crunch?
United States (1)
Lending standards
Euro Area (2)(loans to firms)
(1) Percentage of banks reporting tightening of credit standards
(2) Difference, in percentage points, between banks reporting tightening of credit standards and banks reporting
easing of credit standards
Source: Federal Reserve Source: European Central Bank
-25
-15
-5
5
15
25
35
45
55
65
75
02Q4
03Q1
03Q2
03Q3
03Q4
04Q1
04Q2
04Q3
04Q4
05Q1
05Q2
05Q3
05Q4
06Q1
06Q2
06Q3
06Q4
07Q1
07Q2
07Q3
07Q4
08Q1
08Q2
08Q3
08Q4
09Q1
-40
-20
0
20
40
60
80
100
Q12000
Q22000
Q32000
Q42000
Q12001
Q22001
Q32001
Q42001
Q12002
Q22002
Q32002
Q42002
Q12003
Q22003
Q32003
Q42003
Q12004
Q22004
Q32004
Q42004
Q12005
Q22005
Q32005
Q42005
Q12006
Q22006
Q32006
Q42006
Q12007
Q22007
Q32007
Q42007
Q12008
Q22008
Q32008
Q42008
Q12009
Q22009
large and middle-market firmssmall firmshouseholds (credit cards)
households (other than credit card)
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The policy response in the short run
The policy process - timeline
Stabilization of financial markets Liquidity support
Broadening of collateral accepted by central banks (in Italy: MIC)
Interest rate cuts
Stimulus packages and credit supply Easy monetary policy (and non conventional measures)
Expansionary fiscal policy (TTT vs. PPP)
Stabilization of systemically relevant institutions
liabilities (deposit insurance and bonds issued by banks)
equity (recapitalization and nationalization)
assets (asset relief for toxic, impaired, legacy assets)
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Medium term actions: coordinated and comprehensive
reforms to strengthen the global financial system (1)
Expansion of the scope of regulation to include allsystemically important institutions, markets, instruments
A macro-prudential oversight to supplement the micro-
prudential framework against the build-up of systemic risk
International capital standards and oversight Capital requirements (quantity and quality), and countercyclical
capital buffers
Enhanced liquidity buffers, leverage caps
Other measures Dynamic provisioning ?
Ring fencing ?
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Macroprudential supervision Early identification of potential system-wide risks and
vulnerabilities (forward-looking approach)
Endogeneity of systemic risk (from collective behaviour offinancial institutions and their interaction in financial markets)
Real-financial linkages, asset price misalignments
Strengthening international cooperation Supervision of cross-border groups(supervisory colleges)
Financial Stability Forum: expansion and broader mandate(Financial Stability Board)
IMF and FSB collaboration for the assessment of globalvulnerabilities (Early Warning Exercises)
The regulatory framework in Europe (de Larosire Report)
Medium term actions: coordinated and comprehensive
reforms to strengthen the global financial system (2)
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Open issues (1)
The future of the financial system
Less leverage, less risk, less complexity => less profits Return to traditional lending relationships, higher quality (of loans
and of products)
Risk: probability vs. frequency, tail risk, ergodicity, APT and GE
The future of regulation Reduction of grey areas, more pervasive supervision, more
international cooperation: more rules vs. better rules
Finance and government
Impact on future generations of the cost of bank bailouts Governments as bank shareholders: how to get out ? An industrial
policy for the financial sector ?
In the medium run, need to absorb the liquidity generated to sustain
financial markets
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Open issues (2)
Finance and the real economy How to finance innovation and growth (by definition risky
business)
How to help households finance consumption and retirement
How to preserve the benefits of intertemporal and international
risk sharing
Global imbalances Will savings pick up in the United States?
Will Asian countries increase public spending?
A new monetary system?
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