Crisis and Response: Central Banks and the Financial CrisisStephen Cecchetti* Economic Adviser and Head, Monetary and Economic Department Bank for International Settlements * Views expressed are those of the author and not necessarily those of the BIS
Crisis and Response: Central Banks and the Financial Crisis
Stephen Cecchetti* Economic Adviser and Head, Monetary and Economic Department Bank for International Settlements * Views expressed are those of the author and not necessarily those of the BIS
Outline
Prelude to a Crisis
Central Bank Tools
The Crisis Hits
Policy Response
Ratio of Home Prices to Rents Source: Ratio of Federal Reserve Board flow of funds value of residential real estate, Table B. 100 line 4 to Bureau of Economic Analysis national income and product accounts housing service consumption, table 2.3.5 line 14.
US Mortgage Market
Increase in leverage
Increase in securitization
Shift away from Traditional lending
Note: GSE is “Government Sponsored Enterprise” and refers primarily to Fannie Mae and Freddie Mac.
Leverage Ratios and VaRs
Securitization
A Few Details
Subprime ABS
Often financed by commercial paper (SIVs)
Banks provided back up lines of credit
So long as house prices rise
Refinancing is straightforward
Estimation of default rates is unimportant
Prelude to the Crisis
Home prices at unprecedented levels
Home owners had substantial leverage
Mortgage quality had declined
Asset-backed Securitization had spread
Created opaque instruments used as collateral
The Central Bank Toolbox
Balance Sheet
Traditional Monetary Policy Tools
Large
small
small
Large
Very Small
Balance Sheet Management
Control the size
Control asset composition
Traditional Monetary Policy Tool Box
Overnight/Short-term Interest Rate
Lending and Deposit Facility Rate
The Crisis Hits
Thursday August 9, 2007
ECB injected €94.8 billion overnight
Fed injected $24 billion overnight
Reserves supplied in response to bank demand
Symptoms
LIBOR
Commercial Paper
Spread between 3-month LIBOR and 3-month Expected Federal Funds rate
July 2007 to Present, daily
Comments