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

There are also institutional issues to resolve. A path-dependent technology pattern has developed in the energy field that encourages the current centralized generation model of energy supply. When shifting away the capital investments in technology from centrally planned facilities toward distributed generation, renewable energy technologies and their prospective customers must fight against a tide of perceptions, practices, and market structures designed to facilitate the old central-station ways. In the end, consumers have a difficult time interconnecting renewable energy systems to the existing utility grid, as well as rendering their up-front capital investment into monthly payments that are less than their. | Preprints of the Max Planck Institute for Research on Collective Goods Bonn 2008 43 Systemic Risk in the Financial Sector An Analysis of the Subprime-Mortgage Financial Crisis Martin Hellwig MAX PLANCK SOCIETY Bonn 2008 43 Preprints of the Max Planck Institute for Research on Collective Goods Systemic Risk in the Financial Sector An Analysis of the Subprime-Mortgage Financial Crisis Martin Hellwig November 2008 Max Planck Institute for Research on Collective Goods Kurt-Schumacher-Str. 10 D-53113 Bonn http Systemic Risk in the Financial Sector An Analysis of the Subprime-Mortgage Financial Crisis1 Martin Hellwig Abstract 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 .

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