In the summer of 2007, the U.S.A. experienced rising
default rates in the market for subprime mortgage loans. Because these loans – were securitized and – were in the portfolios of almost all institutions worldwide, the sudden collapse in the value of these securities – led to a sharp drawdown of credit lines (drawing of facilities) by the special purpose entities and other institutions with unexpected write-down requirements (submarine effect). This – exceeded the liquidity management of most banks; some institutions went into a tailspin. – At the same time, in view of this situation, the willingness to lend money without collateral for a week or longer declined; the interbank money market dried up almost completely. As a result, there were significant divergences between secured and unsecured borrowing; the spread between the two types at three-month maturity rose to seventy basis points at its peak. Central banks had to intervene to calm the financial market (at the ECB via fine-tuning operations and longer-term refinancing operations; the latter also to counter tensions in longer-maturity markets) and provide ample liquidity. However, this initially did little to restore confidence in financial markets. – Within a year, the subprime crisis escalated into a global financial crisis. Several reputable institutions in the USA and Europe had to be propped up by the state or were even transferred entirely into state hands in order to avoid a collapse of the financial system. It was not until governments intervened in October 2008 that the lost confidence was gradually regained. – See activity-shifting, on-balance-sheet, incentive scheme, asset-backed securities, default-loss, off-balance-sheet, back-to-originator postulate, bank triage, Bradford nationalization, conduit company, loan liability, limited, loan, nonstandard, loan-versus-paper transaction, decoupling thesis, earn-out clause, first-loss default clause, first-loss tranche, financial alchemy, financial crisis, Fortis rescue, graveyard market, guarantee fund, Hypo Real Estate rescue, supplementary real estate lending, IndyMac bankruptcy, information distribution, asymmetric, credit derivat, credit event, credit substitute, credit risk, collateral crisis, liquidity pool, air securities, mortgage equity withdrawal, ninja loans, Northern Rock debacle, emergency liquidity assistance, originate-to-distribute strategy, panic selling, quantitative easing, risk-return principle, risk culture, risk perception, blowback effect, sovereign wealth funds, voting rights criterion, structured investment vehicle, subprime housing finance, overhead, submarine effect, securitization, traditional, securitization structure, trust, lemon trading, special purpose vehicle, twenty-two credit. – Cf. ECB Monthly Bulletin of September 2007, pp. 33 et seq. (ECB crisis-preventing open market operations), ECB Monthly Bulletin of November 2007, pp. 18 et seq. (effects of the subprime crisis; overviews), ECB Monthly Bulletin of December 2007, pp. 32 et seq. (liquidity management through the minimum reserve policy during the subprime crisis), pp. 45 et seq. (Survey on lending in connection with the subprime crisis; overviews), ECB Monthly Report of January 2008, p. 16 et seq. (ECB liquidity assistance), Deutsche Bundesbank Monthly Report of February 2008, p. 32 (Effects of the subprime crisis on lending by German banks; overview),
ECB Annual Report 2007, pp. 106 ff. (liquidity provision during the subprime crisis), ECB Monthly Report of May 2008, pp. 99 ff. (overview of ECB measures during the subprime crisis; overviews), Deutsche Bundesbank Monthly Report of May 2008, pp. 26 (ECB’s handling of minimum reserve policy to normalize money market discarded by subprime crisis), pp. 34 ff. (no braking effects of subprime crisis on corporate lending), BaFin Annual Report 2007, pp. 22 ff. (chronological overview of events), pp. 123 ff. (individual institutions affected in different ways), ECB Monthly Bulletin of August 2008, pp. 73 ff. (effects of the subprime crisis on cross-border financial flows in the euro area; overviews; p. 75: direct investment hardly affected), ECB Monthly Bulletin of August 2009, pp. 37 ff. (effects of the first longer-term refinancing operation with a one-year maturity), ECB Monthly Bulletin of September 2010, p. 12 ff. (housing market in the U.S.A. since 2002; overviews; skeptical overall assessment), ECB Monthly Bulletin of November 2013, p. 13 ff. (household debt burden in the U.S.A. since 1980; overviews).
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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
Professor Dr. Eckehard Krah, Dipl.rer.pol.
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