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Transcript of Financial Crisis
-Non performing housing loans created a vicious cycle.
S&P Case Schiller Index Mehmet Engin Akbulut
Başak Şirin Mortgage Crisis in 2008 Issues to be Addressed to avoid a repeat of the “subprime” crisis The lack of transparency in the financial crisis of empirical research shows that an inverse relation ! Refers to the replacement of nonmarketable loans or cash flows provided by financial intermediaries with negotiable securities issued in the public capital markets.
These are all sorts of assets are securitized;
Credit card receivables
Corporate or sovereign debt In this crisis, have not been defined sufficiently transparent what kind of assets banks and brokers have, what is the value of assets, and who is the interlocutor of these. These problems make difficult complex commercial contracts having companies such as Lehman Brothers as a bankruptcy risk resulting from the calculation and analysis
when rating agencies started to massively downgrade subprime related structured credits, liquidity evaporated and banks had no other alternative than taking back the assets on their balance sheet. During the third quarter of 2007 The Players and Issues at the Heart of the Crisis Stock Market Returns Subprime borrowers are not very creditworthy, highly levered with high debt-to-income ratios, large loan-to-value ratios, no down payment
In a market where housing prices kept rising, borrowers expected to refinance before the reset and build some equity cushion
Huge demand from investors for higher yielding assets, such as super senior tranches of subprime CDOs, lead to lowering of lending standards: low-documentation or no-documentation loans, “liar loans” First, corporate loans and other retail credit assets
Then, subprime mortgages: subprime loans grew from $160 billion in 2001 (7.2% of new mortgages) to $600 billion (20.6% of new mortgages) in 2006
Delinquency rates on subprime mortgages started to significantly increase after mid-2005 especially on loans originated in 2005-2006 Huge growth of the securitization Investors have opportunity for earning high return.
Financial charges will be reduced.
Allows firms to finance themselves.
Provides low-cost funding source.
Advantages of Securitization; Starting in 2000,mortgage originators in the US relaxed their lending standards and created large numbers of subprime first mortgages.
This,combined with very low interest rates,increased the demand for real estate and prices rose.
To continue to attract first time buyers and keep prices increasing they relaxed lending standards further.
Features of the market:100% mortgages,ARMs,teaser rates,NINJAs,liar loans,non-recourse borrowing.
Mortgages were packaged in financial products and sold to investors. Economic environment since 2000: Rating agencies did not perform any due diligence on the quality of the underlying loans: took for granted the accuracy of the information provided to them by the structurers Rating agencies Crisis of confidence and liquidity crisis has caused contagion to other “unrelated” markets.
Lack of liquidity make it difficult to estimate prices: margin and collateral calls amplify the problem Systemic Risk almost one for each function separately established financial institutions and financial instruments
connected with each other and complex relationships
asymmetric information Lack of Transparency
Structured Special Investment Vehicles (SIVs)
Securitization has created moral hazard: originating lenders had little incentive to perform their due diligence and monitor borrowers’ credit worthiness Mortgage Brokers and Lenders
by the two major rating agencies, mortgage-backed securities note was reduced to 1.9 trillion dollars From the third quarter of 2007 until the second quarter of 2008 ,
the rating agencies only ranks the risk of default.
need to measure the liquidity risk and the risk rating change Another problem,
in a very short period of time before Enron filed for bankruptcy, rating agencies could not be determined that the problem of the company. For example, conflict of interest
give a mark to banks and other financial institutions
ability to make objective evaluation is reduced Rating Agencies Freddie Mac/Fannie Mae Share of Outstanding Mortgages Fannie Mae/Freddie Mac Share The Default Rate Annual Existing House Price Change HOUSE PRICE CHANGE Reduce quality of portfolio
Make difficult money and credit control of Central Bank
Raise as highly credit stocks in the economy.
Prevent healty reporting
Reduce activity of supervision and observation of credit market. Disadvantages of Securitization; Results of the Financial Crisis 1-Decline in the House Prices 2-Decrease in The Growth Rates -Not just the USA and Europe, also developing countries influenced.
-Recovery took a while, so low growth rates continued after crisis. 3-Increase in The Unemployment Rates -Especially influenced USA and developed countries
.-More choosier banking in terms of credit policy. 4-Inflationary Effect 5-Regulations and Interfering Approaches Conclusion -Demand for regulation increased in the developed economies.
-“Market can solve it's problems by itself” thesis is outdated.
-More controller activites are started. -Stronger competition occured among the developing countries.
-Real sector started to having trouble for finding credit.
-Amount of industrial production decreased in many countries.
-Interest rates become the most important competing tool.
-More critical period started for the current deficit. -Not just because of financial crisis, also the rise of gas and food prices made it.
-Especially affected developing countries with high demand for energy. Results of The Financial Crisis Results of The Financial Crisis Results of The Financial Crisis Results of The Financial Crisis Thank you for your attention!