This paper summarizes and explains the main events of the liquidity and credit crunch in 2007-08. Starting with the trends leading up to the crisis, I explain how these events unfolded and how four different amplification mechanisms magnified losses in the mortgage market into large dislocations and turmoil in financial markets.

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Deciphering the Liquidity and Credit Crunch 2007-08

The financial market turmoil in 2007 and 2008 has led to the most severe financial crisis since the Great Depression and threatens to have large repercussions on the real economy The bursting of the housing bubble forced banks to write down several hundred billion dollars in bad loans caused by mortgage delinquencies At the same time, the stock market capitalization of the major banks declined by more than twice as much While the overall mortgage losses are large on an absolute scale, they are still relatively modest compared to the $8 trillion of US stock market wealth lost between October 2007, when the stock market reached an all-time high, and October 2008 This paper attempts to explain the economic mechanisms that caused losses in the mortgage market to amplify into such large dislocations and turmoil in the financial markets, and describes common economic threads that explain the plethora of market declines, liquidity dry-ups, defaults, and bailouts that occurred after the crisis broke in summer 2007 To understand these threads, it is useful to recall some key factors leading up to the housing bubble The US economy was experiencing a low interest rate environment, both because of large capital inflows from abroad, especially from Asian countries, and because the Federal Reserve had adopted a lax interest rate policy Asian countries bought US securities both to peg the exchange rates at an export-friendly level and to hedge against a depreciation of their own currencies against the dollar, a lesson learned from the Southeast Asian crisis of the late 1990s The Federal Reserve Bank feared a deflationary period after the bursting of the Internet bubble and thus did not counteract the buildup of the housing bubble At the same time, the banking system underwent an important transformation The

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Deciphering the Liquidity and Credit Crunch 2007-2008

The aim of this study is to examine the effect of bank-specific, industry-specific and macroeconomic determinants of bank profitability, using an empirical framework that incorporates the traditional Structure-Conduct-Performance (SCP) hypothesis. To account for profit persistence, we apply a GMM technique to a panel of Greek banks that covers the period 1985-2001. The estimation results show that profitability persists to a moderate extent, indicating that departures from perfectly competitive market structures may not be that large. All bank-specific determinants, with the exception of size, affect bank profitability significantly in the anticipated way. However, no evidence is found in support of the SCP hypothesis. Finally, the business cycle has a positive, albeit asymmetric effect on bank profitability, being significant only in the upper phase of the cycle.

Bank-Specific, Industry-Specific and Macroeconomic Determinants of Bank Profitability

The Theory of Monopolistic Competition.

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Bank-specific, industry-specific and macroeconomic determinants of bank profitability

The profitability of European banks during the 1990s is investigated using cross-sectional, pooled cross-sectional time-series and dynamic panel models. Models for the determinants of profitability incorporate size, diversification, risk and ownership type, as well as dynamic effects. Despite intensifying competition there is significant persistence of abnormal profit from year to year. The evidence for any consistent or systematic size‐profitability relationship is relatively weak. The relationship between the importance of off-balance-sheet business in a bank’s portfolio and profitability is positive for the UK, but either neutral or negative elsewhere. The relationship between the capital‐assets ratio and profitability is positive.

The profitability of european banks: a cross-sectional and dynamic panel analysis*

Dynamic panel and cross-sectional regressions are used to estimate growth and profit equations for a sample of commercial, savings, and co-operative banks from five major European Union countries during the mid-1990s. Methodologically, the paper unifies the growth and profit strands in the previous empirical literature. The growth regressions reveal little or no evidence of mean-reversion in bank sizes. Profit is an important prerequisite for future growth. Banks that maintain a high capital-assets ratio tend to grow slowly, and growth is linked to macroeconomic conditions. Otherwise, there are few systematic influences on bank growth. The persistence of profit appears higher for savings and co-operative banks than for commercial banks. Banks that maintain high capital-assets or liquidity ratios tend to record relatively low profitability. There is some evidence of a positive association between concentration and profitability, but little evidence of a link between bank-level x-inefficiency and profitability.

Dynamics of Growth and Profitability in Banking

Recent advances in panel data econometrics are used to investigate the determinants of profitability for manufacturing and service sector firms in Belgium, France, Italy and the UK, for the period 1993–2001. The paper synthesizes empirical models that have been used by researchers in industrial economics, strategic management and accounting and finance. Despite the formation of the European Union's Single Market in goods and services, abnormal profit still appears to persist significantly from year to year. There is evidence of a negative size-profitability relationship, but the relationship between market share and profitability is positive, and stronger in manufacturing than in services. The relationship between a firm's gearing ratio and its profitability is negative, but firms with higher liquidity tend to be more profitable.

Determinants of profitability in European manufacturing and services: evidence from a dynamic panel model

Against a background of far-reaching structural change in the banking sector, this article reviews the recent academic literature on developments in European banking. European banking markets have become increasingly integrated in recent years, but barriers to full integration, especially in retail banking, still remain. European integration has possible implications for systemic risk, and poses various challenges for the current supervisory framework. The banks’ responses to the changing competitive environment include the pursuit of strategies of diversification, vertical product differentiation and consolidation. European integration has implications for competition in banking markets, for the nature of long-term borrower-lender relationships, and for the relationships between ownership structure, technological change and bank efficiency. The article concludes by reviewing recent literature on the credit channel in the monetary transmission mechanism, and interest rate pass-through.

European banking: An overview

This book presents a detailed economic analysis of professional football at club level, using a combination of economic reasoning and statistical and econometric analysis. Most of the original empirical research reported in the book is based on English club football. A wide range of international comparisons help emphasize both the broader relevance as well as the unique characteristics of the English experience. Specific topics include: the links between football clubs' financial strength and competitive balance and uncertainty of outcome; the determinants of professional footballers' compensation; measuring the football manager's contribution to team performance, the determinants of managerial change, and its effects on team performance; patterns of spectator demand for attendance; predicting match results, betting on football, and the market in football clubs' company shares. The book concludes with an extended discussion of the major economic policy issues currently facing football's legislators and administrators worldwide.

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John Goddard

Papers

The profitability of european banks: a cross-sectional and dynamic panel analysis*

Dynamics of Growth and Profitability in Banking

Determinants of profitability in European manufacturing and services: evidence from a dynamic panel model

European banking: An overview

The Economics of Football