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The Crisis of the Financial Markets: Origin, Short-term Reaction and Long term Adaptation Requirements

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  • Thomas Url

    (WIFO)

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    Abstract

    The crisis of the financial markets had its onset as early as February 2007, when the first defaults of mortgage debts with a low rating of creditworthiness were reported. Following that, the crisis shifted to the secured mortgage debt market to finally affect the entire financial system. All in all, the required valuation adjustments in the financial services are estimated to $ 3,400 billion. The resulting losses compelled, on a world-wide basis, the allocation of public funds to credit institutions, a considerable increase of government guarantees to finance credit institutions, the reduction of the key interest rates to approximately 0 percent, and, moreover, direct measures safeguarding liquidity in the credit sector on behalf of the central banks. Macroeconomic imbalances, arbitrage dealings between low and high interest currencies and an overly expansive monetary policy of the US Federal Reserve can be quoted as the macroeconomic reasons for the crisis on the financial markets. However, the crisis also unveiled deficiencies within the control and supervision systems of the financial service providers. The securisation of mortgages and other financial instruments allowed financial service providers to shift business activities outside the regulated area. These regrouping activities in turn required a fair-value assessment of securitised credits and pro-cyclically triggered higher equity provisions within the Basel II standards.

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    File URL: http://www.wifo.ac.at/wwa/pubid/37843
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    Bibliographic Info

    Article provided by WIFO in its journal WIFO-Monatsberichte.

    Volume (Year): 82 (2009)
    Issue (Month): 12 (December)
    Pages: 909-931

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    Handle: RePEc:wfo:monber:y:2009:i:12:p:909-931

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    Keywords: Finanzmarktkrise Finanzinnovationen;

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