THE CONTEXT OF FINANCIAL MARKET TUR

THE CONTEXT OF FINANCIAL MARKET TURMOIL
The NR episode needs to be set in the context of the global financial market turbulence experienced during the summer of 2007. Recent years have experienced an unprecedented wave of complex financial innovation with the creation of new financial instruments and vehicles. In the words of the BOE, this financial innovation had the effect of “creating often opaque and complex financial instruments with high embedded leverage” (BOE, 2007a). Two major instruments at the centre of the financial market turmoil were Securitisation and Collateralised Debt Obligations (CDOs – instruments created from a portfolio of asset-backed securities and then broken into tranches of varying default risk with resulting varied prices): in both cases issue volumes rose sharply in the years prior to the crisis. Figure 1 shows the sharp rise in European securitisations, and figure 2 indicates the volume of global CDO issues and particularly the sharp increase in 2006 and the first half of 2007, followed by an almost total collapse in the summer months of that year.
Securitisation involves a bank bringing together a large number of its loans (e.g. mortgages) into a single package and selling the portfolio into the capital market. The portfolio might be bought by other financial institutions or by specially created Special Purpose Vehicles, Structured Investment Vehicles (SIVs), or Conduits established by the securitising bank itself. The buyer issues securities (e.g. FRNs, asset-backed commercial paper, longer-term paper) which are rated by a rating agency according to the quality of the underlying assets in the portfolio. In effect, the bank passes the loans to others, and the strategy is often referred to as originate-and-distribute even though the purchaser might be a specially-created bankruptcy-remote subsidiary of the bank itself. The bank may offer a line of credit to the purchaser to be activated in the event that the buyer encounters difficulty in renewing its short-term securities.The global market financial turmoil during the summer of 2007 was triggered by developments in the rapidly growing sub-prime mortgage (SPM) market in the US. A high proportion of such mortgage loans were securitised and also combined into instruments such as CDOs. These in turn were rated by rating agencies although, in hindsight, in a misleading way in that a CDO would be given a high rating based on only the small proportion of loans within it that was low risk.
The mortgage-backed securities (MBS) and CDOs were purchased by banks around the world, hedge funds, and conduits established by banks either for themselves or clients. Such purchases were funded in the main by the issue of short term securities (e.g. asset-backed commercial paper) and in some cases received lines of credit from banks including banks initiating securitisation programmes.
Problems emerged at various times during 2007 as a result of a combination of factors: a decline in house prices in the US, the impact of the earlier rise in US interest rates, large-scale defaults on SPMs (during 2007 repossession in the US reached a thirty-seven year high), and a sharp decline in the prices of mortgage-backed securities.
Above all, both the primary and secondary markets in SPM securities effectively closed and concern developed over the exposure of some banks in the market. There was uncertainty, for instance, about which banks were holding MBSs and CDOs. In particular, some banks who were dependent on securitisation programmes encountered serious funding problems because of all these uncertainties. Issuing banks and their conduits faced both a liquidity constraint and a rise in the cost of funding as it became increasingly difficult to roll-over short-term debt issues. Liquidity in the inter-bank markets also weakened and a tiering of interest rates emerged during the summer.
Banks encountered funding difficulties because of their uncertain exposure to the weakening MBS market, or because of their commitment to provide lines of credit to MBS holders. There was also concern that some banks would be required to hold on their balance sheets mortgage assets they had originally intended to securitise and sell. Overall, there was a sharp movement away from the MBS market.
All of this created considerable market uncertainty in the summer months of 2007 which lead to a sharp fall in many asset classes, considerable uncertainty as to the risk exposure of banks, credit markets dried up and most especially those focussed on asset backed securities, and liquidity dried up in the markets for MBSs and CDOs. Overall, there was considerable uncertainty regarding the true value of credit instruments (partly because the market had virtually ceased to function effectively) and the risk exposure of banks. As a result, a loss of confidence developed in the value of all asset-backed securities on a global basis. This was the general context of some banks (and notably NR) facing funding problems.
The liquidity problem became serious because securitisation vehicles such as conduits and SIVs were funding the acquisition of long-term mortgages (and other loans) by issuing short-term debt instruments such as asset-backed commercial paper. As liquidity dried up, banks could not finance their off-balance-sheet vehicles and were forced to take assets back on to the balance sheet or hold on to assets they were planning to securitise. This effectively amounts to a process of re-intermediation.
Although NR was not exposed to the US SPM market, it became caught up in all this because of its business model: securitisation as a central strategy, and reliance on short- term money market funding. It faced several related problems: it could not securitise and sell new mortgage assets and hence needed to keep assets on the balance sheet that it had intended to sell, and it faced a sharp rise in interest rates in the money market with the result that borrowing costs (even in the event that it could borrow at all) rose above the yield on its mortgage assets.
The most serious dimension from a systemic point of view was the run on deposits at NR. Clearly, statements to the effect that the bank was solvent did not convince depositors. In any case, a bank run can be rational if all depositors believe the bank is solvent but also believe that all other depositors believe it is not.

Results (Indonesian) 1:

KONTEKS GEJOLAK PASAR KEUANGANNR episode perlu diatur dalam konteks gejolak pasar keuangan global berpengalaman selama musim panas 2007. Beberapa tahun terakhir telah mengalami gelombang belum pernah terjadi sebelumnya inovasi keuangan yang kompleks dengan penciptaan instrumen keuangan baru dan kendaraan. Dalam kata-kata BOE, inovasi keuangan ini mempunyai efek yang "membuat instrumen keuangan yang sering buram dan kompleks dengan leverage tertanam tinggi" (BOE, 2007a). Dua instrumen utama di pusat gejolak pasar keuangan adalah sekuritisasi dan kredit tanpa kewajiban utang (CDO-instrumen diciptakan dari portofolio Efek Beragun Aset dan kemudian dipecah menjadi bertahap dari berbagai risiko default dengan harga bervariasi yang dihasilkan): dalam kedua kasus masalah volume meningkat tajam pada tahun-tahun sebelum krisis. Gambar 1 menunjukkan peningkatan tajam dalam securitisations Eropa, dan gambar 2 menunjukkan volume CDO isu global dan terutama peningkatan tajam dalam 2006 dan paruh pertama 2007, diikuti oleh hampir total runtuh di musim panas tahun itu.Securitisation involves a bank bringing together a large number of its loans (e.g. mortgages) into a single package and selling the portfolio into the capital market. The portfolio might be bought by other financial institutions or by specially created Special Purpose Vehicles, Structured Investment Vehicles (SIVs), or Conduits established by the securitising bank itself. The buyer issues securities (e.g. FRNs, asset-backed commercial paper, longer-term paper) which are rated by a rating agency according to the quality of the underlying assets in the portfolio. In effect, the bank passes the loans to others, and the strategy is often referred to as originate-and-distribute even though the purchaser might be a specially-created bankruptcy-remote subsidiary of the bank itself. The bank may offer a line of credit to the purchaser to be activated in the event that the buyer encounters difficulty in renewing its short-term securities.The global market financial turmoil during the summer of 2007 was triggered by developments in the rapidly growing sub-prime mortgage (SPM) market in the US. A high proportion of such mortgage loans were securitised and also combined into instruments such as CDOs. These in turn were rated by rating agencies although, in hindsight, in a misleading way in that a CDO would be given a high rating based on only the small proportion of loans within it that was low risk.The mortgage-backed securities (MBS) and CDOs were purchased by banks around the world, hedge funds, and conduits established by banks either for themselves or clients. Such purchases were funded in the main by the issue of short term securities (e.g. asset-backed commercial paper) and in some cases received lines of credit from banks including banks initiating securitisation programmes.Problems emerged at various times during 2007 as a result of a combination of factors: a decline in house prices in the US, the impact of the earlier rise in US interest rates, large-scale defaults on SPMs (during 2007 repossession in the US reached a thirty-seven year high), and a sharp decline in the prices of mortgage-backed securities.Above all, both the primary and secondary markets in SPM securities effectively closed and concern developed over the exposure of some banks in the market. There was uncertainty, for instance, about which banks were holding MBSs and CDOs. In particular, some banks who were dependent on securitisation programmes encountered serious funding problems because of all these uncertainties. Issuing banks and their conduits faced both a liquidity constraint and a rise in the cost of funding as it became increasingly difficult to roll-over short-term debt issues. Liquidity in the inter-bank markets also weakened and a tiering of interest rates emerged during the summer.Banks encountered funding difficulties because of their uncertain exposure to the weakening MBS market, or because of their commitment to provide lines of credit to MBS holders. There was also concern that some banks would be required to hold on their balance sheets mortgage assets they had originally intended to securitise and sell. Overall, there was a sharp movement away from the MBS market.All of this created considerable market uncertainty in the summer months of 2007 which lead to a sharp fall in many asset classes, considerable uncertainty as to the risk exposure of banks, credit markets dried up and most especially those focussed on asset backed securities, and liquidity dried up in the markets for MBSs and CDOs. Overall, there was considerable uncertainty regarding the true value of credit instruments (partly because the market had virtually ceased to function effectively) and the risk exposure of banks. As a result, a loss of confidence developed in the value of all asset-backed securities on a global basis. This was the general context of some banks (and notably NR) facing funding problems.The liquidity problem became serious because securitisation vehicles such as conduits and SIVs were funding the acquisition of long-term mortgages (and other loans) by issuing short-term debt instruments such as asset-backed commercial paper. As liquidity dried up, banks could not finance their off-balance-sheet vehicles and were forced to take assets back on to the balance sheet or hold on to assets they were planning to securitise. This effectively amounts to a process of re-intermediation.Although NR was not exposed to the US SPM market, it became caught up in all this because of its business model: securitisation as a central strategy, and reliance on short- term money market funding. It faced several related problems: it could not securitise and sell new mortgage assets and hence needed to keep assets on the balance sheet that it had intended to sell, and it faced a sharp rise in interest rates in the money market with the result that borrowing costs (even in the event that it could borrow at all) rose above the yield on its mortgage assets.The most serious dimension from a systemic point of view was the run on deposits at NR. Clearly, statements to the effect that the bank was solvent did not convince depositors. In any case, a bank run can be rational if all depositors believe the bank is solvent but also believe that all other depositors believe it is not.

Results (Indonesian) 2:

KONTEKS gejolak pasar keuangan
The NR episode perlu diatur dalam konteks gejolak pasar keuangan global yang dialami selama musim panas 2007. Beberapa tahun terakhir telah mengalami gelombang belum pernah terjadi sebelumnya inovasi keuangan yang kompleks dengan penciptaan instrumen keuangan baru dan kendaraan. Dalam kata-kata BOE, inovasi keuangan ini memiliki efek "menciptakan instrumen keuangan sering buram dan kompleks dengan leverage tertanam tinggi" (BOE, 2007a). Dua instrumen utama di pusat gejolak pasar keuangan yang Sekuritisasi dan dijamin Kewajiban Utang (CDO - instrumen dibuat dari portofolio efek beragun aset dan kemudian dipecah menjadi tahapan dari berbagai risiko gagal bayar dengan menghasilkan harga bervariasi): dalam kedua kasus volume masalah meningkat tajam pada tahun-tahun sebelum krisis. Gambar 1 menunjukkan kenaikan tajam dalam securitisations Eropa, dan angka 2 menunjukkan volume isu CDO global dan khususnya peningkatan tajam pada tahun 2006 dan semester pertama tahun 2007, diikuti oleh runtuhnya hampir total di musim panas tahun itu.
Sekuritisasi melibatkan bank menyatukan sejumlah besar pinjaman (misalnya KPR) ke dalam satu paket dan menjual portofolio ke pasar modal. Portofolio mungkin dibeli oleh lembaga keuangan lainnya atau dengan khusus diciptakan Kendaraan khusus tujuan, Kendaraan Investasi Terstruktur (SIVs), atau Saluran didirikan oleh bank securitising sendiri. Pembeli mengeluarkan surat berharga (misalnya FRN, surat berharga beragun aset, kertas jangka panjang) yang dinilai oleh lembaga pemeringkat sesuai dengan kualitas aset yang mendasari dalam portofolio. Akibatnya, bank melewati pinjaman kepada orang lain, dan strategi sering disebut sebagai berasal-dan-mendistribusikan meskipun pembeli mungkin khusus diciptakan anak kebangkrutan-jauh dari bank itu sendiri. Bank dapat menawarkan jalur kredit untuk pembeli akan diaktifkan dalam hal pembeli bertemu kesulitan dalam memperbaharui pasar global gejolak jangka pendek securities.The nya keuangan selama musim panas tahun 2007 dipicu oleh perkembangan di sub berkembang pesat prime mortgage (SPM) pasar di AS. Sebagian besar dari pinjaman hipotek seperti itu sekuritas dan juga digabungkan menjadi instrumen seperti CDO. Ini pada gilirannya dinilai oleh lembaga pemeringkat meskipun, di belakang, dengan cara menyesatkan dalam bahwa CDO akan diberi rating tinggi berdasarkan hanya sebagian kecil dari pinjaman di dalamnya yang berisiko rendah.
The sekuritas berbasis mortgage (MBS) dan CDO dibeli oleh bank-bank di seluruh dunia, hedge fund, dan saluran yang didirikan oleh bank baik untuk diri sendiri atau klien. Pembelian tersebut didanai di utama oleh isu sekuritas jangka pendek (misalnya beragun aset surat berharga) dan dalam beberapa kasus yang diterima jalur kredit dari bank termasuk bank memulai program sekuritisasi.
Masalah muncul di berbagai kali selama tahun 2007 sebagai akibat dari kombinasi faktor: penurunan harga rumah di AS, dampak dari kenaikan sebelumnya di suku bunga AS, default besar-besaran pada SPMs (selama tahun 2007 kepemilikan di AS mencapai tinggi tiga puluh tujuh tahun), dan penurunan tajam dalam harga sekuritas berbasis mortgage.
Di atas semua, baik di pasar primer dan sekunder pada efek SPM secara efektif ditutup dan kepedulian dikembangkan selama eksposur beberapa bank di pasar. Ada ketidakpastian, misalnya, tentang yang bank memegang MBSS dan CDO. Secara khusus, beberapa bank yang tergantung pada program sekuritisasi mengalami masalah pendanaan yang serius karena semua ketidakpastian ini. Menerbitkan bank dan saluran mereka menghadapi kedua kendala likuiditas dan kenaikan biaya pendanaan karena menjadi semakin sulit untuk roll-over masalah utang jangka pendek. Likuiditas di pasar antar bank juga melemah dan tiering suku bunga muncul selama musim panas.
Bank mengalami kesulitan pendanaan karena paparan pasti mereka ke MBS pasar melemah, atau karena komitmen mereka untuk menyediakan jalur kredit kepada pemegang MBS. Ada juga kekhawatiran bahwa beberapa bank akan diperlukan untuk mempertahankan neraca mereka aset hipotek mereka awalnya ditujukan untuk securitise dan menjual. Secara keseluruhan, ada gerakan tajam dari pasar MBS.
Semua ini menciptakan ketidakpastian pasar yang cukup besar di bulan-bulan musim panas 2007 yang menyebabkan penurunan tajam di banyak kelas aset, ketidakpastian mengenai eksposur risiko bank, pasar kredit kering dan yang paling terutama yang difokuskan pada sekuritas aset didukung, dan likuiditas mengering di pasar untuk MBSS dan CDO. Secara keseluruhan, ada ketidakpastian mengenai nilai sebenarnya dari instrumen kredit (sebagian karena pasar telah hampir berhenti berfungsi secara efektif) dan eksposur risiko bank. Akibatnya, hilangnya kepercayaan dikembangkan di nilai dari semua efek beragun aset pada basis global. Ini adalah konteks umum beberapa bank (dan terutama NR) menghadapi masalah pendanaan.
Masalah likuiditas menjadi serius karena kendaraan sekuritisasi seperti saluran dan SIVs mendanai akuisisi hipotek jangka panjang (dan pinjaman lainnya) dengan menerbitkan utang jangka pendek instrumen seperti surat berharga beragun aset. Likuiditas kering, bank tidak bisa membiayai kendaraan off-balance-sheet dan dipaksa untuk mengambil aset kembali ke neraca atau mempertahankan aset mereka berencana untuk securitise. Ini secara efektif sebesar proses re-intermediasi.
Meskipun NR tidak terkena pasar AS SPM, menjadi terjebak dalam semua ini karena model bisnis: sekuritisasi sebagai strategi utama, dan ketergantungan pada pendanaan pasar uang jangka pendek . Menghadapi beberapa masalah terkait: tidak bisa securitise dan menjual aset hipotek baru dan karenanya dibutuhkan untuk menjaga aset pada neraca yang berniat untuk menjual, dan menghadapi kenaikan tajam suku bunga di pasar uang dengan hasil yang meminjam biaya (bahkan dalam hal itu bisa meminjam sama sekali) naik di atas imbal hasil aset hipotek nya.
Dimensi yang paling serius dari sudut pandang sistemik adalah jangka deposito di NR. Jelas, pernyataan yang menyatakan bahwa bank itu pelarut tidak meyakinkan deposan. Dalam kasus apapun, menjalankan bank yang dapat rasional jika semua deposan percaya bank pelarut tetapi juga percaya bahwa semua deposan lain percaya itu tidak.