The financial crisis and its consequences on the German financial system

Résumé du document

The triggering element of the present financial crisis was the real-estate crisis in the United States. The crisis began with certain indifference in 2006, but then it reached its peak during the second semester of 2008. This was when we observed, day after day, a fall in prices of shares, simultaneously in all the financial centers and activities sectors, along with bankruptcies of certain prestigious banking institutions, as well as serious and expensive internal dysfunctions in many others. These events have led to unusual interventions from the public authorities. These interventions became more and more massive and were coordinated with the view of containing the crisis confidentially. This was done to contain the crisis in the functioning of the financial systems and to limit the gravity of an economic recession in developed countries, with its predictable social consequences. Since the beginning of 2007, certain economists had tried to warn the authorities and the markets on the financial risks ensuing from the increasing debt of the United States, of the insufficient savings in the country, and the potential dangers arising from the volumes of securitized credits. If nobody paid attention to those warnings, particularly in 2007 and during the first semester of 2008, it is because the world growth was still significant, pushing the prices of all assets, up (raw materials, in particular) and therefore the majority of the actors involved believed that this stock-exchange situation, which showed consequent profits, could still last, maybe forever. They were incited to take their stands through sophisticated mathematical approaches of the risk factor, greatly reducing human responsibilities on decisions. Furthermore this dangerous situation was compounded by the weak audience to the predictions of doom as well as the wide range of conflicting opinions on the subject. In September 2008, awareness was finally made public on the occasion of the bankruptcy of the American bank Lehman Brothers. The world was facing a banking crisis of major proportions.

Extraits

[...] As a consequence, the heart of the American and, beyond, the whole world financial system risked imploding due to the lack of liquid assets and the brutal and sudden lack of confidence between the financial actors themselves, nobody knowing who carried the risks of the securities. Thus, banks did not wish to continue lending to the others banks. The companies of any sizes were afraid of limitations on their credit or on their ease for treasury transactions. Institutional investors (insurers, pension funds etc.), the funds or asset management companies, worried about the situation of their customers, played safe and reduced significantly their risky positions on shares (hedge funds). [...]

[...] The crisis had effects on other markets, such as the one of raw materials. According to the analyst John Kilduff, " it is an contagion effect: what is happening on the stock exchanges markets caused a drying out of liquidity, obliging several actors, as hedge funds, to leave the market of the energy and to liquidate their positions”[6]. Thus, the producing economies and the emerging economies were hit even more seriously Consequences on the economic sector There is not just, on one side the fragile financial economy, and on the other side a solid "real" economy, without any connection. [...]

[...] This pursuit of high profit modified the natural first aim of banks: the clientele advisers being urged to sell certain products by means of commissions The emergence of new risks Banks widely underestimated the risk of liquidity. They were more focused on the insolvency risk. However, in the case of the subprime crisis, it is the insolvency of the subprimes borrowers that led to a crisis of illiquidity of structured instruments based on credits subprimes (Couppey-Soubeyran 2008). It was not possible any more to keep exchanging them. The doubt on the banks carrying the subprime risks led to the crisis of illiquidity in the interbank whole market. [...]

[...] It studies the falls in prices and the defaulted loans and then their impact on the stockholders' equities of each bank. At the beginning of May 2009, the results of the stress tests intended to review the state of the American banks and their capacity to face the situation showed that they needed billion of dollars. It comforted markets and banks feeling generally able to raise this amount of capital without needing help from the American government (they continue nevertheless to benefit from very low refinancing rate from the Fed)[9]. [...]

[...] In this regard, the aim to reduce deficits will be, in the coming years, as important as the current stabilisation measures and Germany and the rest of Europe should work in this way. Thus, Germany will establish a new budgetary rule limiting the deficit. Improving budgetary discipline when the economy is in growth while relaxing budget to smooth over economic downturns, the objective is to retrain pro-cyclical budgetary policy and thus, reduce government debt at a satisfactory pace (Baumann & al, 2008). Germany has reacted very fast to support its financial and economic sectors and managed to limit this systemic crisis. [...]