Development and Finance from issue 2009/1

György Szepesi

Structural and Institutional Background of the Financial Crisis

- Abstract -

JEL G-01

2008 passed almost entirely under the shadow of huge institutional crises. By the autumn, the unequivocal and extremely gloomy diagnosis became clear: this was not just a world-wide (global) financial meltdown, the crisis rapidly entered the real economy as well, with destructive consequences. Now nobody really questions or may question the fact that we face a formidable global economic crisis unprecedented for several decades. The crisis was triggered by the fact that final investors started to see their investments were insecure and their risk exposure was high. In spite of the favourable ratings by the rating agencies it became evident that the final investment target, the US housing market, had crashed. Thus, investors started to withdraw their (liquid) investments en masse from Conduit/SIVs and hedge funds, while asset-backed commercial papers could not be renewed either. The liquidity situation of banks was also hindered by the fact that it was almost impossible to source funding on the interbank market. The market price of securities – not only that of mortgage-related papers – plummeted, which drastically increased margins and ‘haircuts’. A general liquidity and lending crisis (credit crunch) developed, which given the current ownership structures of financial institutions extended to developing markets, including Hungary. This is where we were early and mid-October.

György Szepesi, honourable associate professor (Corvinus University Budapest)

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