L'évolution des marchés financiers face à la crise financière - Introduction (full english)

Résumé du document

Financial markets and financial crisis : introduction and contextualisation

Extraits

[...] Thanks to deregulation, market efficiency improved, either through pure competition effects, or thanks to diversity in bank types which contributed to a better diversification of the systemic risk. Nevertheless, the commission report was categorical in stating that the financial collapse was avoidable. It assigns equal blame to the financial industry and regulators, and contradicts their own assertions that the crisis was neither foreseeable nor avoidable. The report blames particularly the Federal Reserve bank system for not stemming the flow of toxic assets - the so-called sub-primes- when they were clearly contradicting the standards of prudent mortgage lending practices. [...]

[...] Because the housing market is always expanding, the household can always sell back the newly-acquired housing unit in a fortnight, and make a profit. There was little downside to this scheme, since it was assumed that housing prices are always increasing, and there is little cost to the transaction as the interest rate on the mortgage was low. On the supply side, banks were presented with a similar opportunity, which turned out to be an issue: the financial markets were flooded with cheap capital, which commercial banks and financial institutions had to employ. [...]

[...] Because theses are customer deposits, in the event these strategies do not pay off, the bank does not necessarily go bankrupt, and public funding may in fact step up to bail out the bank. Paradoxically, it is because the then-Secretary to the Treasury Hank Paulson did not want to bail out Lehman Brothers when there was a run on its shares that the financial markets collapses. Although these were already over-exposed to sub-prime mortgages and other mortgage-backed securities, the general sell-off trend was precipitated by the refusal of Treasury and the Federal Reserve to step in and provide public funding for a bailout. [...]

[...] Following the 2008 financial crisis, the United States Senate established an ad-hoc committee to investigate the roots of the financial collapse, and to identify the culprit. The United States Senate Financial Crisis Inquiry Commission (or Levin-Coburn commission) set out to an ambitious agenda of not only trying to find out why the financial crisis came about, but also provide an exhaustive narrative of how the failure of financial markets to prevent the proliferation of sub-prime mortgage weakened them to negative shocks. [...]

[...] Most financial institutions are well aware of the financial crisis that was brought about nearly a decade ago, and they are keen to remind the public - and themselves- that they have learnt their lesson, and that they can police themselves out of mischief. The Basel committee, which is a set of international banking and financial regulations has sought to strength capital and liquidity requirement designed to avoid bank runs. So far, financial institutions have taken it in stride, and they are regularly submitted to stress tests by their respective regulators. All of this means that the financial markets, institutions and regulators are well aware that past mistake should and would not be repeated. Key concepts. [...]