1. Financial turmoil Denis Besnard (D1)
GFS/EDP course 2014
GFS/EDP course 2012
1/18/2019
Financial turmoil Denis Besnard (D1)
GFS course ch
GFS course ch

2. Content What is the meaning of "Financial crisis"?
GFS/EDP course 2012
GFS/EDP course 2014
1/18/2019
18/01/2019
Content
What is the meaning of "Financial crisis"?
What was the role of Central banks?
How did governments intervene?
What was the statistical impact?
Conclusion
Supplementary EDP table on the financial crisis
GFS course ch

3. What is the financial crisis? (1)
GFS/EDP course 2012
GFS/EDP course 2014
1/18/2019
18/01/2019
What is the financial crisis? (1)
"Official start" in August 2007 (valuation of some Investment funds in US ABS and then "trouble" on Euro Area interbank market)
"Climax" in September 2008 (Lehman Brothers bankruptcy)
As a result, dramatic fall in asset prices on markets, with effect on bank profitability (mark-to-market)
Also, strong "market disruptions" raising refinancing shortfalls for financial institutions and financing corporations (high risk aversion)
Some innovative instruments turned to be "toxic"
"Flight to quality" to "so-called" riskless assets but not all so good
In a first stage: common opinion that it is "just" a bank liquidity crisis
GFS course ch

4. What is the financial crisis? (2)
GFS/EDP course 2012
GFS/EDP course 2014
1/18/2019
18/01/2019
What is the financial crisis? (2)
…but in a second stage doubts on solvency of numerous banks
In parallel, dramatic fall in real estate prices in countries where evident bubble (Ireland, Spain)
String spill-over and contagion effects = systemic crisis / threats on financial stability
Negative economic impact through wealth effects and "credit crunch"
Some banks technically bankrupted and imperatively needed rescue by Authorities
Need for Eurostat July 2009 decision + guidance notes in )
EA sovereign crisis has other origins but double feed-back (nexus) banks support: government cost (not financeable under normal terms) and impact on banks of fall in government bonds prices
GFS course ch

5. Crucial role of central banks
GFS/EDP course 2012
GFS/EDP course 2014
1/18/2019
18/01/2019
Crucial role of central banks
Dramatic fall in intervention rates
As usual, “lender in the last resort” for banks
But “this time it’s different” : also “purchaser of assets in the last resort”
Large use of “non-standard measures” (or "non-conventional"), such as "full/fixed" allocations, "quantitative easing", "VLTROs", enlargement of list of collaterals, etc. (See ECB website)
Aim: providing liquidity at low cost over a long period ("forward guidance")
Financial stability is now a clear objective of CBs
But CBs cannot not fight (alone) insolvency…
GFS course ch

6. Thus, Governments had to intervene under various forms (1)
GFS/EDP course 2012
GFS/EDP course 2013
1/18/2019
18/01/2019
Thus, Governments had to intervene under various forms (1)
Guarantees for individual banks liabilities
contingent assets except if evidence of call
Direct lending:
financial transaction if likely repayment
Liquidity schemes (exchange of assets – government bonds versus “illiquid”):
treated a securities lending but under both conditions: temporary and expected small losses
Special bodies (for funding at better conditions with government guarantees):
not in government sector if autonomy of decision, majority private owners, ex-ante risk rather small (notably if “good” collaterals)
GFS course ch

7. Thus, Governments had to intervene under various forms (2)
GFS/EDP course 2012
GFS/EDP course 2014
1/18/2019
18/01/2019
Thus, Governments had to intervene under various forms (2)
Direct recapitalisations:
Basic analysis: coverage of accumulated losses? (restrictive notion of exceptional losses)
Where ordinary shares, market price is crucial
Where preference shares or “hybrid Tier 1”, fixed rate of return is key (but
Special case of "Cocos"
Special guarantees on deposits, other liabilities, assets: case by case (but basis: likelihood to be called)
Nationalisations: usual rules
Special bodies for equity injections: by definition within government sector
GFS course ch

8. Thus Governments had to intervene under various forms (3)
GFS/EDP course 2012
GFS/EDP course 2014
1/18/2019
18/01/2019
Thus Governments had to intervene under various forms (3)
Direct purchase of "bad" assets:
Price paid is crucial and also possible resale price under a given period
Government-owned "defeasance bodies" (“bad banks”)
Always classified within the government sector
Bank splitting into commercial "viable" unit/ ”liquidated unit" holding bad assets:
Funds provided (to whom?) by government likely to be returned? Expected losses?
“Resolution funds”:
Autonomy of decision? Autopilot? Decisions on regular or exceptional resources?
GFS course ch

9. Conclusion Eurostat quite reactive.
GFS/EDP course 2012
GFS/EDP course 2014
1/18/2019
18/01/2019
Conclusion
Eurostat quite reactive.
Eurostat priority: comparability of the impact on government accounts between MS.
All decisions consistent with fundamental national accounts principle)
But specific guidance for "exceptional measures in exceptional times" where no straightforward provisions (e.g. capital injections in banks not similar to capital injections in non-financial corporations)
Eurostat analysis: “Substance over form” (it is in ESA!)
Ad-hoc follow-up of the impact of the interventions: supplementary table provided with notification tables (annex 5)
GFS course ch

10. GFS/EDP course 2012
1/18/2019
GFS course ch

11. Is the financial crisis over?
GFS/EDP course 2012
GFS/EDP course 2014
1/18/2019
18/01/2019
Is the financial crisis over?
If Yes, what does it mean?
Thanks for your attention!
Any Question?
GFS course ch