The recent credit crisis in the United States ushered in a new era
of uncertainty. In some ways it was just another bubble in a long
line of fi nancial manias. Like any other bubble, it was born out of
an extended period of easy money that fueled prosperity, engendered
speculation, and ended in a spectacular crash. In some very
important ways, however, the lingering impacts are different than
the bubbles of recent memory.
When I first started writing about credit scores more than a decade ago, few
people knew what these three-digit numbers were or how they worked.
Today most people have at least a vague understanding that credit scores
are important. But they often don’t realize how important—until they get
turned down for a loan or an apartment, or wind up paying more interest or
higher insurance premiums than they expected.
The authors study the effect of financial crises on trade credit in a sample of 890 firms in six emerging economies. They find that although provision of trade credit increases right after the crisis, it consequently collapses in the following months and years. The authors observe that firms with weaker financial position (for example, high pre-crisis level of short-term debt and low cash stocks and cash flows) are more likely to reduce trade credit provided to their customers.
It is highly likely that by augmenting the amount of funding available to banks,
securitization activity had a significant and positive impact on credit growth during the years
prior to the credit crisis (Loutskina and Strahan, 2009, Altunbas et al., 2009). In a number of
countries experiencing a period credit growth, securitization activity probably strengthened the
feedback effect between increases in housing prices and the credit expansion.
In the United States, insurance regulators require bonds and preferred stocks to be reported
in statutory financial statements in one of six National Association of Insurance
Commissioners (NAIC) designations categories that denote credit quality. If an accepted
rating organisation (ARO) has rated the security, the security is not required to be filed with
the NAIC’s Securities Valuation Office (SVO). Rather, the ARO rating is used to map the
security to one of the six NAIC designation categories.
Basel II will need to be reworked thoroughly, not just tweaked at the margin. Two of the key features of Basel II are that banks can use their own internal models to calculate capital requirements under Pillar 1, and that credit ratings also serve as risk weights in regulatory capital calculations. These internal models typically generate lower capital requirement for (large) US banks. Suffice it to say that all these elements have had their credibility severely damaged by the events of the past eight months.
Iam happy to present the second English edition of Money,
Bank Credit, and Economic Cycles. Its appearance is particularly
timely, given that the severe financial crisis and resulting
worldwide economic recession I have been forecasting,
since the first edition of this book came out ten years ago, are
now unleashing their fury.
On September 15, 2008, Lehman Brothers, the fourth-largest U.S. investment
bank, filed for bankruptcy, marking the largest bankruptcy in U.S. history and
the burst of the U.S. subprime mortgage crisis. Concerns about the soundness of
U.S. credit and financial markets led to tightened global credit markets around
the world. Spreads skyrocketed. International trade plummeted by double digits,
as figure O.1 illustrates. Banks reportedly could not meet customer demand to
finance international trade operations, leaving a trade finance “gap” estimated at
around $25 billion.
This book has almost nothing to do with the current housing and credit crisis. Wolf only says in the last couple of pages that part of the world savings glut was recycled in excess US residential investment. And, that's it.
This paper considers the main elements of the standard pattern of ﬁ nancial liberalization that
has become widely prevalent in developing countries. The theoretical arguments in favour of
such liberalization are considered and critiqued, and the political economy of such measures
is discussed. The problems for developing countries, with respect to ﬁ nancial fragility and the
greater propensity to crisis, as well as the negative deﬂ ationary and developmental effects, are
Given the unprecedented—by recent standards—financial crisis
that has devastated the world financial system and extended its
reach into a number of other sectors, political risk insurance has
become even more relevant. At the same time, questions remain as
to whether PRI really covers those risks that investors need covered
The debate is also reflected in the efforts to reform the regulatory environment in
response to the current financial crisis. Brunnermeier et al. (2008) also conceptually
distinguish between a regulatory and a market based notion of bank capital. When examining
the roots of the crisis, Greenlaw et al. (2008) argue that banks’ active management of their
capital structures in relation to internal value at risk, rather than regulatory constraints, was a
key destabilising factor.
The ﬁrst time a money market fund broke the buck was in 1994,
when the Denver-based Community Banker’s U.S. GovernmentMoney
Market Fund reported aNAVof $0.96. It had themisfortune of owning
securities that fell sharply in value during the rapid rise in interest rates
that year. Because this was a small fund held by a small number of
institutional shareholders, the impact was limited.
It wasn’t until the credit crisis of 2008 hit that a fund broke the
buck in a dramatic way. This was the Reserve Primary Fund—the ﬁrst
money market fund in the United States.
The use of individuals’ credit histories to predict the risk of future loss has become a
common practice among automobile and homeowners insurers. The practice has proven to
be controversial not only because of concerns about how reliably credit scores may predict
risk. Many industry professionals, policymakers, and consumer groups have expressed
concern that the practice may pose a significant barrier to economically vulnerable segments
of the population in obtaining affordable automobile and homeowners coverage.
The economies of different countries have been affected with different degrees of intensity
according to their exposure to some of the main drivers of the financial crisis.
which has been largely blamed as one of the main contributors to the financial meltdown, is an
important example in place. While in some countries, securitization played a very large role, in
other nations the resort to activities in these markets was insignificant from a macroeconomic
The Committee evaluated the case for lowering the 20% CCF under the Basel II
standardised and FIRB risk-based measures. The CCF is relevant for short-term self-
liquidating trade letters of credit arising from the movement of goods. Essentially, it reduces
capital requirements by 80% as compared to positions that are subject to a 100% CCF.
The current 20% CCF has been part of the Basel capital framework since their inception in
It appears that the 1998 totals are somewhat lower due to the benign credit cycle in the U.S. for
the past five years (1993-1997), when default rates on public high yield bonds averaged less than
2% each year (Exhibit 2, Altman & Kishore, 1998). The supply of public, domestic defaulted
bonds was about $10 billion as of mid-1998 and our best estimate of distressed public debt is
about $13 billion. At the same time, we have noticed an increase in distressed securities in 1998.
The resulting total of defaulted and distressed, public bonds and private debt as of end of August
Water supply and sanitation are amongst the most basic requirements of life. For the past 50 to 150 years people living
in Europe, America and a few capital cities elsewhere around the globe have come to take for granted the provision of a
virtually limitless supply of clean, safe water and the seemingly effortless removal of all human wastes ‘out of sight and
out of mind’.
In recent years, Japan’s major corporations have
increasingly relied on the corporate bond market as a
source of debt finance. From 1996 to 1998, the issuance
of corporate bonds increased more than 46 percent, from
30.8 trillion yen to about 45 trillion yen (Table 1).1 At the
same time, loans from Japan’s banking sector decreased
about 17 trillion yen. As the corporate bond market grew,
the spreads between the yields on Japanese corporate and
government bonds widened dramatically.
While the magnitude of differences in credit scores was very substantial, the impact
of credit scores on pricing and availability varies among companies and is not directly
examined in this study. The impact of scores on premium levels will be directly addressed in
studies expected to be completed by late 2004.
Missouri statue prohibits sole reliance on credit scoring to determine whether to
issue a policy. However, there are no limits on price increases that can be imposed due to
credit scores, so...