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    1

    The financial crisis: some facts, some

    responsibilities, some ways out?

    Ignazio Visco

    Banca dItalia

    NFA, Firenze30 June 2009

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    2

    Structural changes

    Integration of economies and markets Technological and financial innovation

    Demographic trends

    Macro framework

    High rates of growth of the world economy Low inflation rates

    Imbalances Saving rates, current accounts, net foreign positions

    Global liquidity, asset prices, volatility

    Financial framework Financial intermediaries, securitization, structured products

    Investment strategies, risk management

    Some facts

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    National savings and investment of selected countries and country groups

    (in percent of GDP)

    United States

    12

    14

    16

    18

    20

    22

    1990

    1991

    1992

    1993

    1994

    1995

    1996

    1997

    1998

    1999

    2000

    2001

    2002

    2003

    2004

    2005

    2006

    2007

    2008

    National Saving National Investment

    Euro area

    19

    20

    21

    22

    23

    24

    1990

    1991

    1992

    1993

    1994

    1995

    1996

    1997

    1998

    1999

    2000

    2001

    2002

    2003

    2004

    2005

    2006

    2007

    2008

    National Saving National Investment

    Japan

    22

    24

    26

    28

    30

    32

    34

    36

    1990

    1991

    1992

    1993

    1994

    1995

    1996

    1997

    1998

    1999

    2000

    2001

    2002

    2003

    2004

    2005

    2006

    2007

    2008

    National Saving National Investment

    China

    30

    35

    40

    45

    50

    55

    60

    1990

    1991

    1992

    1993

    1994

    1995

    1996

    1997

    1998

    1999

    2000

    2001

    2002

    2003

    2004

    2005

    2006

    2007

    2008

    National Saving National Investment

    Em. Asia exc. China

    22

    24

    26

    28

    30

    32

    34

    1990

    1991

    1992

    1993

    1994

    1995

    1996

    1997

    1998

    1999

    2000

    2001

    2002

    2003

    2004

    2005

    2006

    2007

    2008

    National Saving National Investment

    Oil exporters

    15

    20

    25

    30

    35

    40

    1990

    1991

    1992

    1993

    1994

    1995

    1996

    1997

    1998

    1999

    2000

    2001

    2002

    2003

    2004

    2005

    2006

    2007

    2008

    National Saving National Investment

    Source: IMF, World economic

    outlook, April 2009.

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    Some responsibilities

    Economic agents: wrong incentives?

    Budget constraints

    Planning horizons

    Policymakers: political cycles and ideology?

    Macroeconomic (MP and FIT; Fiscal policy)

    Regulatory and supervision (Light touch; Basel 1 and 2)

    Economic theories and models: rational behaviour?

    Macro: nmc, rbc, nke (DSGE) Finance: apt, risk (mark to market, rating)

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    Ways out?

    Macro-policies

    Monetary policy, liquidity mopping out Fiscal policy, exit from public debts

    Macro-prudential policy?

    Global macro surveillance (G-20, IMF: IMS?)

    Financial regulation

    FSB (perimeter, markets, products, intermediaries)

    Basel process

    Economics

    Behavioural theories?

    Econometric models

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    Further details

    Post-Lehman

    Forecasting

    Policy responses

    Open Issues

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    Stages of the crisis: pre and post Lehman

    Before Lehman

    Liquidity risk

    Inflation risk

    Recourse to markets,

    central banks Advanced economies

    crisis

    After Lehman

    Credit risks

    Deflation risks

    Government interventions

    Emerging economies crisis

    Onset of the crisis

    (9 August 2007)

    Default of Lehman Brothers: confidence

    crisis

    15 September 2008

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    Some relevant facts: a confidence crisis (1)

    Large banks:Losses and recapitalizations

    (billion dollars)

    Source: Bloomberg.

    0

    50

    100

    150

    200

    250

    300

    350

    400

    Dec-2006 Dec-2007 Dec-2008 Dec-2009

    0

    50

    100

    150

    200

    250

    300

    350

    400

    Euro

    US Dollar

    British Pound

    Interest rate spread

    between three-month interbank

    loans with and without collateral

    0

    50100

    150

    200

    250

    300

    350

    400

    450

    2007 Q3

    or

    earlier

    2007 Q4 2008 Q1 2008 Q2 2008 Q3 2008 Q4 2009 Q1

    losses stock issues

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    Some relevant facts: a confidence crisis (2)

    Banks: stock price indices(end of June 2007=100)

    Banks: CDSpremia (1)(basis points)

    (1) Simple averages. Investment banks not included.

    0

    50

    100

    150

    200

    250

    300

    350

    Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09

    US

    UK

    France

    Switz

    Italy

    Source: Bloomberg. Source: Datastream.

    010

    20

    30

    40

    50

    60

    7080

    90

    100

    110

    Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09

    US

    Euro area

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    Some relevant facts:

    transmission to the real economy (1)

    United States Japan United Kingdom

    average range average range average range

    2009 -2.9 [-3.9;-2.1] -6.1 [-8.1;-1.2] -3.8 [-4.5;-3.1]

    2010 1.8 [-0.3;3.8] 1.3 [-0.1;4.2] 0.3 [-1.0;2.0]

    GDP growth forecasts for the US, UK and Japan

    Source: Consensus Forecasts (May 11, 2009).

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    Some relevant facts:

    transmission to the real economy (2)

    -coin

    GDP growth forecasts for the euro area

    Consensus Forecasts

    Source: Banca dItaliaSource: Consensus Forecasts

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    Some relevant facts: repercussions on

    inflation

    United States Euro Area

    Source: Survey of Professional Forecasters Source: Consensus Forecasts.

    Consumer price inflation forecasts

    1

    1.5

    2

    2.5

    3

    2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

    1 year ahead inflation forecast

    10 years ahead inflation forecast

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    A credit crunch?

    United States (1)

    Lending standards

    Euro Area (2)(loans to firms)

    (1) Percentage of banks reporting tightening of credit standards

    (2) Difference, in percentage points, between banks reporting tightening of credit standards and banks reporting

    easing of credit standards

    Source: Federal Reserve Source: European Central Bank

    -25

    -15

    -5

    5

    15

    25

    35

    45

    55

    65

    75

    02Q4

    03Q1

    03Q2

    03Q3

    03Q4

    04Q1

    04Q2

    04Q3

    04Q4

    05Q1

    05Q2

    05Q3

    05Q4

    06Q1

    06Q2

    06Q3

    06Q4

    07Q1

    07Q2

    07Q3

    07Q4

    08Q1

    08Q2

    08Q3

    08Q4

    09Q1

    -40

    -20

    0

    20

    40

    60

    80

    100

    Q12000

    Q22000

    Q32000

    Q42000

    Q12001

    Q22001

    Q32001

    Q42001

    Q12002

    Q22002

    Q32002

    Q42002

    Q12003

    Q22003

    Q32003

    Q42003

    Q12004

    Q22004

    Q32004

    Q42004

    Q12005

    Q22005

    Q32005

    Q42005

    Q12006

    Q22006

    Q32006

    Q42006

    Q12007

    Q22007

    Q32007

    Q42007

    Q12008

    Q22008

    Q32008

    Q42008

    Q12009

    Q22009

    large and middle-market firmssmall firmshouseholds (credit cards)

    households (other than credit card)

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    The policy response in the short run

    The policy process - timeline

    Stabilization of financial markets Liquidity support

    Broadening of collateral accepted by central banks (in Italy: MIC)

    Interest rate cuts

    Stimulus packages and credit supply Easy monetary policy (and non conventional measures)

    Expansionary fiscal policy (TTT vs. PPP)

    Stabilization of systemically relevant institutions

    liabilities (deposit insurance and bonds issued by banks)

    equity (recapitalization and nationalization)

    assets (asset relief for toxic, impaired, legacy assets)

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    Medium term actions: coordinated and comprehensive

    reforms to strengthen the global financial system (1)

    Expansion of the scope of regulation to include allsystemically important institutions, markets, instruments

    A macro-prudential oversight to supplement the micro-

    prudential framework against the build-up of systemic risk

    International capital standards and oversight Capital requirements (quantity and quality), and countercyclical

    capital buffers

    Enhanced liquidity buffers, leverage caps

    Other measures Dynamic provisioning ?

    Ring fencing ?

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    Macroprudential supervision Early identification of potential system-wide risks and

    vulnerabilities (forward-looking approach)

    Endogeneity of systemic risk (from collective behaviour offinancial institutions and their interaction in financial markets)

    Real-financial linkages, asset price misalignments

    Strengthening international cooperation Supervision of cross-border groups(supervisory colleges)

    Financial Stability Forum: expansion and broader mandate(Financial Stability Board)

    IMF and FSB collaboration for the assessment of globalvulnerabilities (Early Warning Exercises)

    The regulatory framework in Europe (de Larosire Report)

    Medium term actions: coordinated and comprehensive

    reforms to strengthen the global financial system (2)

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    Open issues (1)

    The future of the financial system

    Less leverage, less risk, less complexity => less profits Return to traditional lending relationships, higher quality (of loans

    and of products)

    Risk: probability vs. frequency, tail risk, ergodicity, APT and GE

    The future of regulation Reduction of grey areas, more pervasive supervision, more

    international cooperation: more rules vs. better rules

    Finance and government

    Impact on future generations of the cost of bank bailouts Governments as bank shareholders: how to get out ? An industrial

    policy for the financial sector ?

    In the medium run, need to absorb the liquidity generated to sustain

    financial markets

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    Open issues (2)

    Finance and the real economy How to finance innovation and growth (by definition risky

    business)

    How to help households finance consumption and retirement

    How to preserve the benefits of intertemporal and international

    risk sharing

    Global imbalances Will savings pick up in the United States?

    Will Asian countries increase public spending?

    A new monetary system?

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