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Risk ManagementUniversity of Economics, Kraków, 2012              Tomasz Aleksandrowicz
risk at financial markets             current financial crisis        financial risk management
Biggest XX centaury financial crises•   1929 - Wall Street Crash (Great Depression)•   1973 – oil prices crisis (1973 – 19...
world financial crisis           financial crisis in 2007 – 2012 (?)case story: dramatic turn of events of 2008
phases of the crisis•   US housing bubble burst causing sub-prime    mortgage crash (2006)•   banking and financial market...
• 17 February – UK  government  nationalized struggling  Northern Rock bank
• March 14 – Bear Stearns  gets $30bn Fed funding as  shares plummet• March 16 – Bear Stearns is  acquired for $240m a by ...
• March - July – more banks around the world starts to  announce huge losses many of them seek financing by issuing  stock...
• September 7 - US government takeover of Fannie Mae and  Freddie Mac• two companies at that time owned or guaranteed abou...
• September 14 –  Merrill Lynch, 158-year  old investment bank is  sold to Bank of America  for $50bn
• September 15 – Lehman  Brothers goes bankrupt• Stock Exchange collapse:  DIJA down 500 points,  FTSE100 down 400  points
• September 16 – AIG credit  ratings downgraded• September 16 – $140bn  withdrawn from money  market funds which causes  f...
• September 18 –  HBOS plc the biggest  UK mortgage  provider took over by  Lloyds TSB for £12bn
US government response• September 18 - Treasury Secretary Henry Paulson and Fed  Chairman Ben Bernanke meets with legislat...
• September 25 – due to  bank run and $16.4bn  deposit withdrawn in 10  days Washington Mutual is  closed down by regulato...
• September 29 - Citigroup Inc.  announced that he would acquire  banking operations of Wachovia• Later October 3: Wells F...
• September 29 –  September 31: As  crisis hits Europe –  more banks  nationalized
• First days of October  – Iceland banking  sector nationalized• stock exchange  operations  suspended• rating agencies  d...
US solution to liquidity crisis                 • October 3 – President George W.                   Bush signs act creatin...
October 6 2008– October 10 2008• Worst week for the stock market in 75 years• The Dow Jones loses 22.1%, its worst week ev...
World Recession in 2009(% GDP change)
Europe sovereign debt crisis
roots of world financial crisis         causes of crisis in risk perspective                        main consequences
causes of financial crisis•   no simple answer•   many direct and indirect factors•   variety of narratives describing the...
• Regulatory and market-based controls did not effectively  protect this system or measure the buildup of risk
roots of financial crisis• policy of deregulation of financial sector• historically low interest rates• derivatives market...
sources of financial risk                      xxx
Rm 06
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Rm 06
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Transcript of "Rm 06"

  1. 1. Risk ManagementUniversity of Economics, Kraków, 2012 Tomasz Aleksandrowicz
  2. 2. risk at financial markets current financial crisis financial risk management
  3. 3. Biggest XX centaury financial crises• 1929 - Wall Street Crash (Great Depression)• 1973 – oil prices crisis (1973 – 1974 market crash)• 1987 – Black Monday (19 October)• 1989 – 1991 - savings and loan crisis (US)• 1990 - Japanese asset price bubble• 1992–93 – Black Wednesday (16 September)• 1994 - economic crisis in Mexico• 1997 - Asian financial crisis• 1998 - Russian financial crisis• 2001 - dot-com bubble
  4. 4. world financial crisis financial crisis in 2007 – 2012 (?)case story: dramatic turn of events of 2008
  5. 5. phases of the crisis• US housing bubble burst causing sub-prime mortgage crash (2006)• banking and financial market crisis (2008 - 2009)• global recession (started 2009)• sovereign debt crisis (started 2010)
  6. 6. • 17 February – UK government nationalized struggling Northern Rock bank
  7. 7. • March 14 – Bear Stearns gets $30bn Fed funding as shares plummet• March 16 – Bear Stearns is acquired for $240m a by JPMorgan Chase in a fire sale to avoid bankruptcy (worth $18bn year earlier)
  8. 8. • March - July – more banks around the world starts to announce huge losses many of them seek financing by issuing stock or from governments
  9. 9. • September 7 - US government takeover of Fannie Mae and Freddie Mac• two companies at that time owned or guaranteed about half of the US $12 trillion mortgage market• this move causes panic on the markets
  10. 10. • September 14 – Merrill Lynch, 158-year old investment bank is sold to Bank of America for $50bn
  11. 11. • September 15 – Lehman Brothers goes bankrupt• Stock Exchange collapse: DIJA down 500 points, FTSE100 down 400 points
  12. 12. • September 16 – AIG credit ratings downgraded• September 16 – $140bn withdrawn from money market funds which causes freeze of CP market• September 17 – US FED lends $85bn to AIG to prevent bankruptcy
  13. 13. • September 18 – HBOS plc the biggest UK mortgage provider took over by Lloyds TSB for £12bn
  14. 14. US government response• September 18 - Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke meets with legislators with proposal of $700 billion emergency bailout of toxic assets
  15. 15. • September 25 – due to bank run and $16.4bn deposit withdrawn in 10 days Washington Mutual is closed down by regulator – remaining assets sold to JP Morgan Chase for $1.9bn• at that time bank assets were worth $307bn
  16. 16. • September 29 - Citigroup Inc. announced that he would acquire banking operations of Wachovia• Later October 3: Wells Fargo makes a higher offer for Wachovia paying $15bn
  17. 17. • September 29 – September 31: As crisis hits Europe – more banks nationalized
  18. 18. • First days of October – Iceland banking sector nationalized• stock exchange operations suspended• rating agencies downgrades• economic downturn• Iceland first country to seek IMF help
  19. 19. US solution to liquidity crisis • October 3 – President George W. Bush signs act creating a $700 bn Troubled Assets Relief Program (TARP) to purchase failing bank assets • October 6 – Fed announces that it will provide $900 billion in short- term cash loans to banks • October 7 – Fed makes emergency move to lend $1.3 trillion directly to companies outside the financial sector (effect of freeze in CP)
  20. 20. October 6 2008– October 10 2008• Worst week for the stock market in 75 years• The Dow Jones loses 22.1%, its worst week ever on record, down 40.3 % since reaching a record high of 14,164.53 October 9, 2007.• The Standard & Poors 500 index loses 18.2 %, its worst week since 1933, down 42.5 % in since its own high October 9, 2007
  21. 21. World Recession in 2009(% GDP change)
  22. 22. Europe sovereign debt crisis
  23. 23. roots of world financial crisis causes of crisis in risk perspective main consequences
  24. 24. causes of financial crisis• no simple answer• many direct and indirect factors• variety of narratives describing the crisis• highlights from risk management perspective
  25. 25. • Regulatory and market-based controls did not effectively protect this system or measure the buildup of risk
  26. 26. roots of financial crisis• policy of deregulation of financial sector• historically low interest rates• derivatives market not regulated• rise of financial engineering and complexity of the securities• sub-prime loans and predatory loans• rating agencies paid by security issuer model• financial sector salaries and incentives connected with short term performance (not regulated)• commodities boom
  27. 27. sources of financial risk xxx
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