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How the Subprime Crisis Went Global: Evidence from Bank Credit Default Swap Spreads

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Author Info

  • Barry Eichengreen

    (Department of Economics, University of California, Berkeley)

  • Ashoka Mody

    (International Monetary Fund)

  • Milan Nedeljkovic

    (National Bank of Serbia)

  • Lucio Sarno

    (Cass Business School, City University, London)

Abstract

How did the Subprime Crisis, a problem in a small corner of U.S. financial markets, affect the entire global banking system? To shed light on this question we use principal components analysis to identify common factors in the movement of banks.credit default swap spreads. We find that fortunes of international banks rise and fall together even in normal times along with short-term global economic prospects. But the importance of common factors rose steadily to exceptional levels from the outbreak of the Subprime Crisis to past the rescue of Bear Stearns, reflecting a diffuse sense that funding and credit risk was increasing. Following the failure of Lehman Brothers, the interdependencies briefly increased to a new high, before they fell back to the pre-Lehman elevated levels .but now they more clearly reflected heightened funding and counterparty risk. After Lehman’s failure, the prospect of global recession became imminent, auguring the further deterioration of banks loan portfolios. At this point the entire global financial system had become infected.

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Bibliographic Info

Paper provided by National Bank of Serbia in its series Working papers with number 21.

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Length: 30 pages
Date of creation: Jul 2012
Date of revision:
Handle: RePEc:nsb:wpaper:21

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Keywords: subprime crisis; credit default swap; common factors;

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References

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