Since late 2006, with the increasing house bubble in the United States, the whole financial system in U.S began to pay for its crazy innovation in the past few years. In 2007, the financial crisis or called subprime crisis started eventually. Bank industry was heavily influenced in the crisis. No single bank could stay alone. Many banks went bankruptcy because of insolvent. However, some big banks survived from the crisis and expanded themselves by acquiring other banks which were in trouble.
We will simply review how bank industry dealed with the financial crisis and what was the relation between the crisis and bank industry. From 2007 to 2010, the fact that foreign banks had a 1.83% market share in China Market from 2.38% may have something to do with the liquidity need and capital requirement problems. On the other hand, they may expect the future economic development of China will slow down. From the performance of different banks, we can see nowadays bank management and regulation is gradually a global topic. No finance system or bank can separate from their counterparties.
Tranditionally, commercial banks and investment banks have different jobs in bank business. They aim at different customer group and take profit from respective service. However, since year 2000 till the whole breaking of subprime crisis, we saw this two kinds banks, together with rating agencies built financial “dreams” in the United States.
Deregulation paved the main road for both innovation and unstability of the financial system in the United States. Then banks took part in the sells and creation of various complicated financial products. There was less restriction after ï¿½Financial Services Modernization Actï¿½of 1999 which could be seen as a sign of the beginning of deregulation. New financial derivatives based on portfolios with different default risk appeared dramatically. Banks tried to combine assets with different cash flows, which they called securitization. At the same time, banks gave high risk loan to people who had a great probability that they would not afford to pay the loan. Banks made the loan rate floating that those who got the loan would pay the lower rate at the beginning. On the other hand, investment banks recommended so called triple A rating securities to their customers. However, they actually may have opened position which bet that their recommendation products would lose money. During that period, bank industry took large profit from their selling derivatives. In the context of such a closely related security food chain, no one paid more attention on risks and defaults. Hence, banks played a main role in the process of subprime crisis. And investment banks obviously speeded up the form of bubble such as house bubble.
During 2007 till 2010, the whole world economics was in the recession. We will give a few diagrams to show the economic situation during that time period. The M&A
Bloomberg World Real Estate Index
Global M&A results
GDP Annual growth in U.S Unemployment Rate and Inflation in U.S
Source: www.shadowstats.com Source: www.calculatedriskblog.com
The whole bank industry could not stay alone in this financial crisis. We can see the slump from the following figures. They show the bank industry activity performance since 2007. And now it seems that the whole world economy may face another recession since 2007.
Bloomberg World Banks Index Bloomberg Asia Pacific Banks Index
Source: Bloomberg Source:Bloomberg
Bank M&A statistics
However, all bubble games have the same ending. When price of houses began to plunge and bad loan rate rose dramatically, financial crisis was inevitable. Many diversified service banks were involved in bankruptcy and acquisitions. In the following table, we listed some main events and decisive bankruptcies and acquisitions during 2007 to 2010:
June 17, 2007
Two Bear Stearns subprime hedge funds collapse
July 10 and 12, 2007
Credit rating agencies issue first mass ratings
downgrades of hundreds of RMBS and CDO
January 11, 2008
Countrywide announces sale to Bank of America
March 24, 2008
Federal Reserve Bank of New York forms Maiden
Lane I to help JPMorgan Chase acquire Bear Stearns
July 11, 2008
IndyMac Bank fails and is seized by FDIC
September 7, 2008
U.S. takes control of Fannie Mae and Freddie Mac
September 15, 2008
Lehman Brothers bankruptcy
September 15, 2008
Merrill Lynch announces its sale to Bank of America
September 25, 2008
WaMu fails, is seized by FDIC, and is sold to
In the following part, we list price diagrams of several diversified banks. During QE1 and QE2 period, people estimated the whole world economic situation would go through v-shaped bottom. The fact is not so optimistic
DBK (currency: EUR) GS(currency: USD)
HSBC(currency: GBP) BofA(currency: USD)
From the diagrams above, we can see the price level of such big banks has almost slumped to the lowest level range during 1H, 2009. The world economic recession looms ahead of main economy unions. Europe debt crisis and US debt problem make investors confusing and worrying again. In the past two week, the USD index rallied to a high level since Jan, 2011.