Advanced Financial

Risk Management

Assessment-2
January 5, 2024
Tutor- Prof. Kim Tai Chow
Group-5
Zhai Qingqing, Shirine Bansal, Wang Yuxi
Global Financial Crisis
 The global financial crisis refers to
a severe disruption in the world's
financial system that occurred
primarily between 2007 and 2008.

 It stemmed from a complex mix of

factors including the bursting of
the U.S. housing bubble,
widespread mortgage defaults,
risky financial products, and
regulatory shortcomings.

 This crisis led to the collapse or

near-collapse of major financial
institutions, triggered a global
economic downturn, and resulted
in widespread unemployment and
financial distress around the
world.
 Securitization Process
 Securitization is a financial process that
involves pooling various types of contractual
debt obligations and converting them into
tradable securities.

 The Securitization Process encompasses

several crucial stages, i.e., Pooling of Assets,
Creating SPV’s, Issuing Securities and Selling
Securities.

 Overall, securitization plays a role in

enhancing liquidity in the financial markets,
managing risks, and enabling financial
institutions to access funds by converting
various assets into tradable securities.
Causes and Consequences of GFC

CAUSES
 Housing Market Bubble
 Subprime Mortgage Crisis
 Securitization and Complex Financial Products
 Excessive Leverage and Complexity
 Regulatory Failures
CONSEQUENCES
 Bank Failure
 Economic Recession
 Market Turmoil
 Government Interventions
 Regulatory Reforms
Reduction of Bank Failures for Future Financial Crises

 Basel III, a response to vulnerabilities from the 2007-2008

financial crisis, aims to reduce bank failures during recessions.

 The framework mandates increased capital adequacy ratios,

particularly Tier 1 capital, and introduces the Countercyclical
Capital Buffer to stabilize lending in economic ups and downs.

 Basel III prioritizes robust risk management via stress tests and
liquidity requirements like the Liquidity Coverage Ratio.
Enhanced regulatory oversight and global cooperation are also
crucial, evaluating risk profiles and promoting international
coordination.
Failure of Silicon Valley Bank
CAUSES
 Business Challenges- SVB's downfall was influenced by disruptions
triggered by higher rates. Startup clients withdrawing deposits to sustain
their businesses in challenging IPO and private fundraising environment
left SVB capital deficient.
 Governance Lapses- Board's failure to effectively oversee senior
leadership and hold them accountable exacerbated SVB's situation.

CONSEQUENCES
 Economic Fallout- Collapse of SVB- left individuals bereft of savings,
finances, and investments. Similarly, businesses face potential liquidity
shortages, which could lead to debt challenges and funding deficits.
 Government Aid- The U.S. government swiftly acted to SVB failure.
The FDIC declared its intent to offer additional funding to eligible
depository institutions, ensuring full reimbursement for depositors. This
funding, aimed to stabilize the situation.
POSSIBILITY OF DEVELOPING INTO FINANCIAL CRISIS
 Real Estate Market Bubble
 Subprime Mortgage Crisis
 Regulatory Inadequacies
 Failure of Signature Bank
CAUSES
 Risk in Business Expansion- Overzealous risk-taking, aggressive loan
portfolio expansions/ venturing into precarious markets, poses
substantial threats.
 Management Challenges- Inadequate management of operations and
risks led to chaotic internal processes, irregular operations. These
deficiencies increase vulnerability of the bank to irregularities, fraud.
CONSEQUENCES
 Economic Ramifications- Bank collapse trigger capital shortage,
unemployment rates, recession.
 Government Support- SB's collapse affects financial system,
emergency government intervention may become necessary to stabilize
markets and safeguard customers. However, such actions could add to the
government's fiscal burden.
POSSIBILITY OF DEVELOPING INTO FINANCIAL CRISIS
 Subprime Crisis
 Real Estates Loan
 Financial Derivatives
Failure of Credit Suisse
CAUSES
 Management Restructuring- Ineffective communication and
collaboration between new management and employees may cause
internal conflicts and disruptions, potentially leading to bankruptcy.
 Impact of Interest Rate Changes- External economic factors-
adjustments in central bank interest rates, could contribute to Credit
Suisse's collapse. Failure to adapt to interest rate fluctuations could
heighten financial risks.

CONSEQUENCES
 Market Disruption- Collapse of Credit Suisse incite market panic and
instability. Investor confidence in other financial institutions may
diminish, leading to reduced fund liquidity, increased market interest
rates, and potentially triggering a financial crisis.
 Government Involvement- Swiss bank UBS acquired Credit Suisse to
fortify global banking system and avert its potential collapse. Government
intervention to mitigate adverse economic effects, possibly through loans
or rescue packages aimed at stabilizing affected businesses markets.
POSSIBILITY OF DEVELOPING INTO FINANCIAL CRISIS
 Regulators overhauled financial markets and institutions
 Less Impact on 2008 Global Financial Crisis