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


  • Thomas Url



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.

Suggested Citation

  • Thomas Url, 2009. "The Crisis of the Financial Markets: Origin, Short-term Reaction and Long term Adaptation Requirements," WIFO Monatsberichte (monthly reports), WIFO, vol. 82(12), pages 909-931, December.
  • Handle: RePEc:wfo:monber:y:2009:i:12:p:909-931

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    References listed on IDEAS

    1. Rafael Repullo & Jesús Saurina & Carlos Trucharte, 2010. "Mitigating the pro-cyclicality of Basel II," Economic Policy, CEPR;CES;MSH, vol. 25, pages 659-702, October.
    2. Zingales Luigi, 2009. "Yes We Can, Secretary Geithner," The Economists' Voice, De Gruyter, vol. 6(2), pages 1-5, February.
    3. Palomino, Frederic & Prat, Andrea, 2003. " Risk Taking and Optimal Contracts for Money Managers," RAND Journal of Economics, The RAND Corporation, vol. 34(1), pages 113-137, Spring.
    4. Plantin, G. & Sapra, H. & Shin, H S., 2008. "Fair value accounting and financial stability," Financial Stability Review, Banque de France, issue 12, pages 85-94, October.
    5. Christopher Mayer & Karen Pence & Shane M. Sherlund, 2009. "The Rise in Mortgage Defaults," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 27-50, Winter.
    6. Jodi G. Scarlata & Juan Sole & Alicia Novoa, 2009. "Procyclicality and Fair Value Accounting," IMF Working Papers 09/39, International Monetary Fund.
    7. Jean-Claude Trichet, 2009. "The ECB's Enhanced Credit Support," CESifo Working Paper Series 2833, CESifo Group Munich.
    8. Philip Lowe, 2002. "Credit risk measurement and procyclicality," BIS Working Papers 116, Bank for International Settlements.
    9. John B. Taylor, 2009. "The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong," NBER Working Papers 14631, National Bureau of Economic Research, Inc.
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    Finanzmarktkrise Finanzinnovationen;


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