Credit Crisis in 30 slides

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  • Chris, I think the reverse pyramid of credit is the best visual summary I've seen so far on the credit crisis.
    I was actually thinking of a similar pie representation with each bank being a slice of that pie to also show the connection with banks and the extension of credit as the thinning of the pie crust (to push on this metaphor).
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Credit Crisis in 30 slides

  1. The Credit Crisis explained in 30 slides...….
  2. ........a Bank is a Credit Intermediary – or “Middleman” £ £ Bank Borrower Depositor
  3. But rather than lending pre-existing money, it creates new money as interest–bearing credit….
  4. … .which is then deposited back into the system
  5. Now, if you think about it, a Bank’s true economic function.....
  6. … is to guarantee that the borrowers’ credit is good…
  7. Interest is charged for the use of the guarantee Interest Bank Borrowers
  8. ..from which Interest is paid to Depositors.. Interest Interest Bank Borrowers Depositors
  9. ..Default and Operating costs deducted... Interest Interest Costs Bank Borrowers Depositors
  10. ..and a profit to Investors normally results Interest Interest Costs Investors Bank Borrowers Depositors
  11. Result: Banks create a Pyramid of Credit, on a base of Equity Bank Credit Bank Equity
  12. Demand for Credit has been so high…
  13. … .that Banks began to “outsource” their guarantee to rid themselves of risk.
  14. … and thus allow their Equity to support more credit creation
  15. Banks outsourced risk totally – through “securitising” debt and sale to investors….
  16. … temporarily – with “Credit Derivatives” (a time-limited guarantee)….
  17. … and partially – using credit insurance from insurers such as AIG
  18. The Result was a bigger Credit Pyramid than Banks alone could sustain… Investor Equity Credit Bank Equity
  19. … and an opaque “shadow banking system” of Investors holding “sliced and diced” risk… Investor Equity Credit Bank Equity
  20. The extended pyramid of Credit funded the Mother of All Bubbles in US property prices...
  21. ....and in August 2007 the bubble started to deflate....
  22. ..but by now no-one knew where the Risk lay… Investor Equity Credit Bank Equity
  23. Banks started to think, “if this is what our balance sheet looks like…..”
  24. “… what does everyone else’s look like…..?”
  25. … and stopped lending to each other.......
  26. The problem is not shortage of money - liquidity – Central Banks can handle that….
  27. … ..it is shortage of Equity - a Solvency problem – which Central Banks cannot handle…..
  28. Bank Equity is being eaten away by defaults….
  29. … and Investors will not recapitalise the shadow banking system…
  30. The Result? Equity Credit

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