Systemic Risk in the Financial Sector: An Analysis of the Subprime-Mortgage Financial Crisis

By Martin F. Hellwig. 2009

389 citations recorded by the source corpus.

The paper analyses the causes of the current crisis of the global financial system, with particular emphasis on the systemic elements that turned the crisis of subprime mortgage-backed securities in the United States, a small part of the overall system, into a worldwide crisis. The first half of the paper explains the role of mortgage securitization as a mechanism for allocating risks from real estate investments and discusses what has gone wrong and why in the implementation of this mechanism in the United States. The second half of the paper discusses the incidence of systemic risk in the crisis. Two elements of systemic risk are identified. First, there was excessive maturity transformation through conduits and structured-investment vehicles (SIVs); when this broke down in August 2007, the overhang of asset-backed securities that had been held by these vehicles put significant additional downward pressure on securities prices. Second, as the financial system adjusted to the recognition of delinquencies and defaults in US mortgages and to the breakdown of maturity transformation of conduits and SIVs, the interplay of market malfunctioning or even breakdown, fair value accounting and the insufficiency of equity capital at financial institutions, and, finally, systemic effects of prudential regulation created a detrimental downward spiral in the overall financial system. The paper argues that these developments have not only been caused by identifiably faulty decisions, but also by flaws in financial system architecture. In thinking about regulatory reform, one must therefore go beyond considerations of individual incentives and supervision and pay attention to issues of systemic interdependence and transparency.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/7ded454e4a698dc767ac620f74f6a32e29a8e2e6

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Citations in the corpus

Pro-Cyclical Capital Regulation and Lending (2016, background): “Brunnermeier (2009) and Hellwig (2009) discuss how pro-cyclical features of the regulation contributed to the financial crisis.”
The Pricing of Government-Guaranteed Bank Bonds (2010, neutral): “The , 2009) or in the context of currency crisis models and international financial contagion (Adrian and Shin, 2008; Hellwig, 2009).”
Asset Price Bubbles and Systemic Risk (2019, neutral): “Brunnermeier (2009), Hellwig (2009) as well as Shleifer and Vishny (2011) argue that it is exactly such dynamics that make risk systemic.”
A Convenient Scapegoat: Fair Value Accounting by Commercial Banks during the Financial Crisis (2012, neutral): “Register View Metrics”
On the International Transmission of Shocks : Micro-Evidence from Mutual Fund Portfolios (2012, background): “8 See, for example, Shiller (2008), Eichengreen et al. (2009), Hellwig (2009), and Mishkin (2011).”
Did Fair-Value Accounting Contribute to the Financial Crisis? (2010, background): “Detailed discussions of these problems can be found in Ashcraft and Schuermann (2008), Cox (2008), Rajan, Seru, and Vig (2008), Hellwig (2009), and Gorton (forthcoming).”
Capital Regulation after the Crisis: Business as Usual? (2010, background): “Suggested Citation: Hellwig, Martin (2010) : Capital Regulation after the Crisis: Business as Usual?, CESifo DICE Report, ISSN 1613-6373, ifo Institut für Wirtschaftsforschung an der Universität München, München, Vol.”
Committee Independence and Financial Institution Performance During the 2007–08 Credit Crunch: Evidence from a Multi‐Country Study (2011, background): “The governance for risk control may not be able to provide downside-market protection if the members do not have enough information needed for assessing the risk exposures (Hellwig, 2009).”
Understanding the Role of Debt in the Financial System (2015, neutral): “Invoking the empirical success of the EMH (in a variant they call relative EMH), Gilson and Kraakman (2014) among others have advocated that the same recipes be 2 But it appears that they did trade on very limited information in money markets; see Hellwig (2009).”
The Devil is in the Tails: Actuarial Mathematics and the Subprime Mortgage Crisis (2010, methodology): “Among currently available, more academic, excellent analyses are Brunnermeier (2009), Crouhy et al. (2008) and Hellwig (2009).”
The Financial Crisis and the Systemic Failure of Academic Economics (2009, background): “It should also be noted that the price system itself can exacerbate the difficulties in the financial market (see Hellwig, 2008).”