The US subprime-crisis became a headline in the global media starting in February 2007 after the US housing market had already shown first signs of a slowdown in late 2006 (DiMartino & Duca, 2007, p. 1). Previously, the US housing market had enjoyed a favorable environment, especially from 2002 to 2005, which was characterized by low interest rates, rising house values, and increasing home financing possibilities through subprime mortgages (Krinsman, 2007, pp. 13-14). However, more and more events were published during the year by US mortgage brokers, international investment banks, and central banks around the world that presented a picture which caused today’s perception of the subprime-crisis. What’s more, the subprime-crisis is far from being over: an end to the crisis is not yet in sight.
One rather unique characteristic of this crisis is that its actual basis is the delinquencies and defaults of subprime single-family home mortgages in the US (Kiff & Mills, 2007, p. 3) which is commonly not regarded to be of great relevance for the international capital markets. However, taking into account the originate and distribute business model of US mortgage brokers in connection with the securitization of these mortgages into various types of securities that are traded on a global basis, it is not surprising to observe that banks and investment funds around the world were invested into these securities. Before the crisis started, only a few banks or funds considered the liquidity of these securities when investing significant amounts of money in them because they focused on maximizing their returns. But, when larger problems in the US subprime mortgage market became evident, liquidity became the major concern for investors and investor preferences significantly shifted to safer assets such as government bonds (Fender & Hördahl, 2007, pp. 9-11). This caused severe problems in the money market, which ultimately brought the crisis across the Atlantic to Europe. Moreover, funding problems emerged and caused the first bank run in Europe in decades when depositors in Britain started to queue outside Northern Rock branches for hours to withdraw their deposits in light of fears that the bank might have to file for bankruptcy (The Economist, 2007a, para. 28).
Inhaltsverzeichnis (Table of Contents)
- Introduction
- Fundamentals of the Subprime-Crisis
- The US Housing and Subprime Mortgage Market
- Characteristics of Subprime Mortgages
- Business Model of US Mortgage Brokers
- Financial Instruments Underlying the Subprime-Crisis
- Consequences of the Fragmented Securitization Process
- The Development of the Subprime-Crisis
- Situation of the US Housing Market up to 2007
- Timeline of the Subprime-Crisis in 2007
- Spillover Effects from the Mortgage Market to the Global Capital Markets
- Consequences for the British Banking Market
- Empirical Analysis About the Subprime-Crisis
- History and Overview of Event Studies
- Framework of an Event Study
- Selection of Relevant Data
- British Banks and Market Index
- News about Private Financial Institutions and Central Banks
- Event Study About the Subprime-Crisis
- Event Study Methodology
- Formulation and Testing of Hypotheses
- Interpretation of Results
- Year-round Performance of the British Banking Sector in 2007
- Summary and Conclusion
Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)
This thesis aims to investigate the impact of the subprime mortgage crisis on European banks, specifically focusing on the British banking market. It seeks to analyze the crisis's development, its transmission mechanisms to global markets, and its effects on British banks using an event study methodology. * The mechanics of the US subprime mortgage market and the characteristics of subprime mortgages. * The role of financial innovation and securitization in amplifying the crisis. * The transmission of the crisis from the US housing market to global capital markets and its impact on the British banking sector. * The application of event study methodology to analyze the impact of the crisis on British bank stock prices. * The overall performance of the British banking sector during 2007 in the context of the subprime crisis.Zusammenfassung der Kapitel (Chapter Summaries)
Introduction: This chapter introduces the thesis's motivation, which stems from the significant impact of the subprime crisis on global financial markets. It outlines the objective of investigating the crisis's effects on European banks, focusing on the British banking market. The chapter details the research methodology, which is based on an event study approach to analyze the impact on stock prices. The scope and limitations of the study are also defined. Fundamentals of the Subprime-Crisis: This chapter provides a foundational understanding of the subprime mortgage crisis. It comprehensively explains the structure of the US housing market, the characteristics of subprime mortgages, the business model of US mortgage brokers, and the crucial financial instruments that fueled the crisis, such as mortgage-backed securities and collateralized debt obligations. It emphasizes the role of securitization and its consequences for the financial system. The chapter provides crucial context for understanding the crisis's subsequent development. The Development of the Subprime-Crisis: This chapter meticulously traces the evolution of the subprime crisis. It begins with the situation of the US housing market leading up to 2007, highlighting the factors that contributed to the bubble. It then presents a detailed timeline of the crisis in 2007, outlining key events and their sequence. The chapter also analyzes the spillover effects from the US mortgage market to the global capital markets and assesses the specific consequences for the British banking market, providing a crucial link between the initial problem and its broader repercussions. Empirical Analysis About the Subprime-Crisis: This chapter details the empirical analysis conducted to assess the impact of the subprime crisis on British banks. It introduces the history and methodology of event studies, explaining how this quantitative technique is applied to financial market data. The chapter outlines the selection of relevant data, which includes British bank stock prices and news related to financial institutions and central banks. It then presents the results of the event study, showing how the abnormal returns of British bank stocks were influenced by specific news and events related to the crisis. The analysis incorporates the year-round performance of the British banking sector within the context of the broader market.Schlüsselwörter (Keywords)
Subprime mortgage crisis, European banks, British banking market, event study, securitization, mortgage-backed securities, collateralized debt obligations, financial contagion, global capital markets, housing market bubble, stock prices, abnormal returns.
Frequently Asked Questions: A Comprehensive Language Preview of the Subprime Mortgage Crisis and its Impact on the British Banking Market
What is the main focus of this document?
This document provides a comprehensive overview of the subprime mortgage crisis and its impact, specifically focusing on the British banking market. It includes a table of contents, objectives, key themes, chapter summaries, and keywords. The core analysis utilizes an event study methodology to assess the crisis's effects on British bank stock prices.
What topics are covered in the "Fundamentals of the Subprime Crisis" chapter?
This chapter lays the groundwork by explaining the US housing market's structure, characteristics of subprime mortgages, the business model of US mortgage brokers, and key financial instruments (like mortgage-backed securities and collateralized debt obligations) that fueled the crisis. It highlights the role of securitization and its consequences.
How does the document analyze the impact of the crisis?
The document uses an event study methodology to empirically analyze the impact of the subprime mortgage crisis on British banks. This involves examining British bank stock prices and related news to determine the crisis's effect on stock performance.
What data was used in the empirical analysis?
The empirical analysis uses data on British bank stock prices and news related to private financial institutions and central banks to assess the impact of the crisis. This allows for a quantitative assessment of the crisis's effects on the British banking sector.
What is the significance of the "Development of the Subprime Crisis" chapter?
This chapter traces the crisis's evolution, starting with the pre-2007 US housing market situation and providing a detailed timeline of key events in 2007. It then analyzes the crisis's spread to global markets and its specific consequences for the British banking system.
What are the key findings or conclusions of the study (as summarized in the document)?
While specific results of the event study are not detailed in the preview, the document aims to show how the subprime crisis affected British bank stock prices and the overall performance of the British banking sector throughout 2007. The full analysis would provide a deeper understanding of these impacts.
What are the key words associated with this research?
Key words include: Subprime mortgage crisis, European banks, British banking market, event study, securitization, mortgage-backed securities, collateralized debt obligations, financial contagion, global capital markets, housing market bubble, stock prices, abnormal returns.
What is the overall objective of the thesis?
The thesis aims to investigate the impact of the subprime mortgage crisis on European banks, particularly in the British banking market, by analyzing the crisis's development, transmission mechanisms, and effects using an event study methodology. It also explores the performance of the British banking sector during 2007 within the context of the crisis.
What is the methodology used in this research?
The primary methodology is an event study, a quantitative technique used to analyze the impact of specific events (in this case, news and developments related to the subprime crisis) on financial market data (British bank stock prices).
Where can I find more detailed information?
The provided text is a preview and summary. The full thesis would provide more detailed information on the methodology, data analysis, and results of the event study.
- Quote paper
- Jan-Frederik Modell (Author), 2008, The impact of the subprime-crisis on european banks, Munich, GRIN Verlag, https://www.grin.com/document/91325
