The subprime crisis: Size, deleveraging and some policy options

Adrian Blundell-Wignall

OECD Journal: Financial Market Trends, 2008, vol. 2008, issue 1, 29-53

Abstract: The paper revises our previous USD 300 bn estimate for mortgage related losses to a range of USD 350-420 bn. In doing this the paper explicitly rejects the previous approach based on implied defaults from ABX pricing, because these prices are affected by illiquidity and extreme volatility; they will likely lead to misleading estimates of losses. Instead it builds a proper default model approach and allows for recovery of collateral via house sales over time. The paper separates out the losses due to commercial banks in the US, and goes on to look at the implied deleveraging required to meet capital standards. It could take 6-12 months for banks to offset losses via earnings alone, depending on Fed rate cuts and the dividend policy of banks. Since even more capital than this is required if banks were to expand their balance sheets, the paper looks at possibilities for capital injections from groups like sovereign wealth funds; and it also looks at a novel plan for the use of public money with an RTC-style approach and the issue of zero coupon bonds. Finally the paper looks at the issues of moral hazard, the likely size of the impact in Europe and Asia and non-bank corporate leverage.

Date: 2008
References: Add references at CitEc
Citations: View citations in EconPapers (9)

Downloads: (external link)
https://doi.org/10.1787/fmt-v2008-art2-en (text/html)
Full text available to READ online. PDF download available to OECD iLibrary subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oec:dafkad:5kzllc3r1346

Access Statistics for this article

More articles in OECD Journal: Financial Market Trends from OECD Publishing Contact information at EDIRC.
Bibliographic data for series maintained by ().