tailieunhanh - Liquidity and financial contagion

Total outstanding adjustable-rate subprime mortgages are less than USD 1 trillion. Moreover, those mortgages originated during 2006 and early 2007 represent only a fraction of that total. Thus, even if subprime delinquency rates keep climbing to unprecedented levels, it seems likely that total losses will be roughly in a range of USD 100-200 billion. Although this is a lot of money, it pales next to the USD 58 trillion of net worth of US households or the USD 16 trillion market capitalization of the US equity market. To put these losses in perspective, a 1 percent gain or loss in the. | Liquidity and financial contagion Tobias ADRIAN Senior Economist Capital Markets Function Federal Reserve Bank of New York Hyun Song shin Professor of Economics Princeton University There is an apparent puzzle at the heart of the 2007 credit crisis. The subprime mortgage sector is small relative to the financial system as a whole and the exposure was widely dispersed through securitization. Yet the crisis in the credit market has been potent. Traditionally financial contagion has been viewed through the lens of defaults where if A has borrowed from B and B has borrowed from C then the default of A impacts B which then impacts C etc. However in a modern market-based financial system the channel of contagion is through price changes and the measured risks and marked-to-market capital of financial institutions. When balance sheets are marked to market asset price changes show up immediately on balance sheets and elicit response from financial market participants. Even if exposures are dispersed widely throughout the financial system the potential impact of a shock can be amplified many-fold through market price changes. NB The views expressed in this paper are those of the authors and not necessarily those of the Federal Reserve Bank of New York or the Federal Reserve System. Banque de France Financial Stability Review - Special issue on liquidity No. 11 February 2008 1 Articles Tobias Adrian and Hyun Song Shin Liquidity and financial contagion r I he credit crisis of 2007 began with the deterioration in the credit quality of subprime mortgages in the United States. However by most measures the total size of credit exposures could be argued to be small. The ferocity with which the crisis has unfolded raises important questions on the nature of financial contagion. The question is well posed in a recent speech by William Dudley Executive Vice President of the Federal Reserve Bank of New Total outstanding adjustable-rate subprime mortgages are less than USD 1 .

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