How did a domestic housing slump turn into a global financial crisis?
The global financial crisis clearly started with problems in the U.S. sub-prime sector and spread across the world from there. But was the direct exposure of foreigners to the U.S. financial system a key driver of the crisis, or did other factors account for its rapid contagion across the world? To answer this question, we assessed whether countries that held large amounts of U.S. mortgage-backed securities (MBS) and were highly dependent on dollar funding experienced a greater degree of financial distress during the crisis. We found little evidence of such direct spillovers from the United States to abroad. Although CDS spreads generally rose higher and bank stocks generally fell lower in countries with more exposure to U.S. MBS and greater dollar funding needs, these correlations were not robust, and they fail to explain the lion’s share of the deterioration in asset prices that took place during the crisis. Accordingly, less tangible channels of contagion may have played a more important role in the global spread of the crisis: a generalized run on global financial institutions, given the opacity of their balance sheets; excessive dependence on short-term funding; vicious cycles of mark-to-market losses driving fire sales of MBS; the realization that financial firms around the world were pursuing similar (flawed) business models; and global swings in risk aversion. The U.S. sub-prime crisis, rather than being a fundamental driver of the global crisis, may have been merely a trigger for a global bank run and for disillusionment with a risky business model that already had spread around the world.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Moser, Thomas, 2003. "What Is International Financial Contagion?," International Finance, Wiley Blackwell, vol. 6(2), pages 157-78, Summer.
- Barry Eichengreen & Ashoka Mody & Milan Nedeljkovic & Lucio Sarno, 2009.
"How the Subprime Crisis Went Global: Evidence from Bank Credit Default Swap Spreads,"
NBER Working Papers
14904, National Bureau of Economic Research, Inc.
- Eichengreen, Barry & Mody, Ashoka & Nedeljkovic, Milan & Sarno, Lucio, 2012. "How the Subprime Crisis went global: Evidence from bank credit default swap spreads," Journal of International Money and Finance, Elsevier, vol. 31(5), pages 1299-1318.
- Barry Eichengreen & Ashoka Mody & Milan Nedeljkovic & Lucio Sarno, 2012. "How the Subprime Crisis Went Global: Evidence from Bank Credit Default Swap Spreads," Working papers 21, National Bank of Serbia.
- Morris Goldstein, 1998. "The Asian Financial Crisis," Policy Briefs PB98-1, Peterson Institute for International Economics.
- Carol C. Bertaut & William L. Griever & Ralph W. Tryon, 2006. "Understanding U.S. cross-border securities data," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue May, pages A59-A75.
- Patrick McGuire & Nikola Tarashev, 2007.
"Global monitoring with the BIS international banking statistics,"
CGFS Papers chapters,
in: Bank for International Settlements (ed.), Research on global financial stability: the use of BIS international financial statistics, volume 29, pages 176-204
Bank for International Settlements.
- Patrick McGuire & Ilhyock Nikola Tarashev, 2008. "Global monitoring with the BIS international banking statistics," BIS Working Papers 244, Bank for International Settlements.
- Gary B. Gorton, 2008.
"The Panic of 2007,"
NBER Working Papers
14358, National Bureau of Economic Research, Inc.
- Ricardo J. Caballero & Alp Simsek, 2013.
"Fire Sales in a Model of Complexity,"
Journal of Finance,
American Finance Association, vol. 68(6), pages 2549-2587, December.
- Viral V Acharya & Philipp Schnabl, 2010. "Do Global Banks Spread Global Imbalances? Asset-Backed Commercial Paper during the Financial Crisis of 2007–09," IMF Economic Review, Palgrave Macmillan, vol. 58(1), pages 37-73, August.
- Fratzscher, Marcel, 2009.
"What explains global exchange rate movements during the financial crisis?,"
Journal of International Money and Finance,
Elsevier, vol. 28(8), pages 1390-1407, December.
- Fratzscher, Marcel, 2009. "What explains global exchange rate movements during the financial crisis?," Working Paper Series 1060, European Central Bank.
- Karolyi, G Andrew, 2003.
"Does International Financial Contagion Really Exist?,"
Wiley Blackwell, vol. 6(2), pages 179-99, Summer.
- G. Andrew Karolyi, 2004. "Does International Financial Contagion Really Exist?," Journal of Applied Corporate Finance, Morgan Stanley, vol. 16(2-3), pages 136-146.
- Viral V. Acharya & Philipp Schnabl, 2010. "Do Global Banks Spread Global Imbalances? The Case of Asset-Backed Commercial Paper During the Financial Crisis of 2007-09," NBER Working Papers 16079, National Bureau of Economic Research, Inc.
- Patrick McGuire & Goetz von Peter, 2009. "The US dollar shortage in global banking," BIS Quarterly Review, Bank for International Settlements, March.
- Carol C. Bertaut & Laurie Pounder, 2009. "The financial crisis and U.S. cross-border financial flows," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Nov.
- Steven B. Kamin & Laurie Pounder DeMarco, 2010. "How did a domestic housing slump turn into a global financial crisis?," International Finance Discussion Papers 994, Board of Governors of the Federal Reserve System (U.S.).
- Tobias Adrian & Hyun Song Shin, 2008. "Financial intermediary leverage and value at risk," Staff Reports 338, Federal Reserve Bank of New York.
- Daniel O. Beltran & Laurie Pounder & Charles Thomas, 2008. "Foreign exposure to asset-backed securities of U.S. origin," International Finance Discussion Papers 939, Board of Governors of the Federal Reserve System (U.S.).
When requesting a correction, please mention this item's handle: RePEc:eee:jimfin:v:31:y:2012:i:1:p:10-41. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If references are entirely missing, you can add them using this form.