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8 Lessons from the Crisis

8 Lessons from the Crisis. Andrew Haldane Bank of England May 2009. 8 Lessons. Finance is not a Golden Goose…. Cumulative ‘Excess’ Returns to Finance. Excess Returns to Finance. UK Equity Market Annual Returns. 8 Lessons. Finance is not a Golden Goose… …unless it is geared.

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8 Lessons from the Crisis

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  1. 8 Lessons from the Crisis Andrew Haldane Bank of England May 2009

  2. 8 Lessons • Finance is not a Golden Goose…

  3. Cumulative ‘Excess’ Returns to Finance Excess Returns to Finance UK Equity Market Annual Returns

  4. 8 Lessons • Finance is not a Golden Goose… • …unless it is geared

  5. Leverage and Returns on Equity Contributions to Year-on-year UK Financial Equity Returns Profits and Leverage for Global Banks – End 2007

  6. 8 Lessons • Finance is not a Golden Goose… • …unless it is geared • Size matters

  7. Size and Leverage Global Banks’ Size and Leverage ratios (a) Capital Injections vs. Balance Sheet Size as at End 07

  8. 8 Lessons • Finance is not a Golden Goose… • …unless it is geared • Size matters • Banks cannot “pass” a stress-test

  9. Changing Distribution of Risk Probability Density for UK GDP Growth Probability Density for UK Unemployment

  10. Long-Run Capital Levels for US Commercial Banks 1840-1993

  11. 8 Lessons • Finance is not a Golden Goose… • …unless it is geared • Size matters • Banks cannot “pass” a stress-test • Payment/settlement systems worked …

  12. Values in Payment/Settlement Systems Daily Volumes and Values Settled in CLS Activity in UK Settlement System (CREST)

  13. 8 Lessons • Finance is not a Golden Goose… • …unless it is geared • Size matters • Banks cannot “pass” a stress-test • Payment/settlement systems worked … • …but some OTC markets did not

  14. CDS Uncertainty and Central Counterparties CDS Premia and Network Uncertainty – Pre Crisis CDS Premia and Network Uncertainty – Post Crisis

  15. 8 Lessons • Finance is not a Golden Goose… • …unless it is geared • Size matters • Banks cannot “pass” a stress-test • Payment/settlement systems worked … • …but some OTC markets did not • Poor eyesight generates blind panic

  16. Mapping the Global Financial Network

  17. 8 Lessons • Finance is not a Golden Goose… • …unless it is geared • Size matters • Banks cannot “pass” a stress-test • Payment/settlement system worked … • …but some OTC markets did not • Poor eyesight generates blind panic • Banks need to earn profits

  18. Profitability of Banks LCFI’s Return on Common Equity LCFI’s Equity Prices

  19. Returns to Financial Sectors Cumulative Total Returns Pairwise correlation of cumulative returns

  20. Due Diligence Test

  21. Gross Capital Flows UK gross cross-border capital flows Gross capital inflows

  22. Demand Shock

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