Finance Commons^™

Lessons Learned: Paul Tucker, Salil Gupta

Journal of Financial Crises

After joining the Bank of England (BoE) in 1980, Sir Paul Tucker held a number of positions of increasing responsibility including serving as a member of several key committees. Tucker played a crucial role in the BoE’s response to the Global Financial Crisis (GFC) as director for markets, through March 2009, then as deputy governor of the bank until November 2013. Post-crisis, he has been instrumental in constructing the international regulatory framework on financial stability. From 2016 to 2021, Tucker also chaired the Systemic Risk Council.

Currently, Tucker is a research fellow at Harvard Kennedy School, Mossavar-Rahmani Center for Business …

Lessons Learned: Pedro Machado, Mercedes Cardona

Journal of Financial Crises

Pedro Machado began his career as a legal adviser to the European Central Bank in the years leading up the Global Financial Crisis (GFC), then joined the Bank of Portugal (BOP) in 2006, where he has held several positions. He was chief of staff to Portugal’s minister of state and finance in 2011, during the European Sovereign Debt Crisis, when the government negotiated a bailout with the International Monetary Fund (IMF) and European Union. He returned to the BOP, as deputy director of the prudential supervision department, while the program was being implemented. The EUR 78 billion bailout was largely …

United States: Reserve Primary Fund Suspension, 2008, Anmol Makhija

Journal of Financial Crises

In 2008, the Reserve Primary Fund was the world’s third-largest money market fund with $62.5 billion in assets. Following Lehman Brothers’ bankruptcy filing on September 15, the Primary Fund’s $785 million position in Lehman debt securities was underwater, and the fund faced severe redemption pressures from investors. In just two days, redemption requests surpassed $40 billion. Owing to the fund’s inability to liquidate assets at or above par value in the frozen markets and the inability of its sponsor, the Reserve Management Company, Inc. (RMCI), to support investors, the Reserve announced on September 16 that the Primary Fund had “broken …

United States: Citigroup Emergency Liquidity Program, 2008, Vincient Arnold

Journal of Financial Crises

By November 21, 2008, against the backdrop of heavy losses during the Global Financial Crisis, Citigroup counterparties were substantially pulling back from the firm. On November 23, the US Department of the Treasury, Federal Deposit Insurance Corporation (FDIC), and Federal Reserve announced a support package for Citi composed of a capital injection and a loss-sharing arrangement on $300.8 billion of assets. Under the Asset Guarantee Program (AGP), Citi would absorb the first $39.5 billion in losses on a mutually agreed upon pool of risky assets; the Treasury and FDIC provided $15 billion in loss protection after that, combined with Citi’s …

United States: Bear Stearns Emergency Liquidity Assistance, 2008, Vincient Arnold

Journal of Financial Crises

On Thursday, March 13, 2008, the US investment bank Bear Stearns Companies approached the Federal Reserve Bank of New York (FRBNY), saying it expected many of its repurchase agreement (repo) counterparties would not “roll,” or renew, their repo agreements the next day. As a result, the firm would be obligated to repay many of its repo liabilities. Without an emergency loan, Bear would be forced to file for bankruptcy on Friday morning, March 14. Before the market opened on Friday, the FRBNY made an overnight loan for $12.9 billion through JPMorgan Chase Bank (JPMC) on a nonrecourse basis, which on-lent …

United States: Bank Of America Emergency Liquidity Program, 2009, Vincient Arnold

Journal of Financial Crises

On December 31, 2008, Bank of America (BofA) finalized its acquisition of Merrill Lynch, absorbing losses of $15.5 billion as a result. Regulators were concerned about BofA’s short-term liquidity position and ability to post more collateral if its credit rating was downgraded. On January 16, 2009, the Federal Reserve, Federal Deposit Insurance Corporation (FDIC), and Department of the Treasury announced an interagency support package to BofA, which included an asset guarantee wherein all three agencies shared losses with BofA on a “ring-fenced” $118 billion pool of assets. Under the ring-fencing arrangement, known as the Asset Guarantee Program (AGP), BofA would …

Spain: Caja De Ahorros Castilla–La Mancha Emergency Liquidity Assistance, 2009, Vincient Arnold, Lakshimi Swaminathan

Journal of Financial Crises

Following years of rapid credit expansion in the real estate sector and reliance on wholesale funding between 2000 and 2008, Caja de Ahorros de Castilla–La Mancha (CCM) found itself on the brink of insolvency in early 2009. Normally, a Eurosystem bank in CCM’s position would turn to the European Central Bank (ECB) to obtain liquidity through its standing financing facilities, but CCM lacked eligible collateral to tap them. Consequently, in February 2009, the Bank of Spain (BoS) provided emergency liquidity assistance (ELA) of EUR 900 million to CCM, secured against CCM assets, to help meet its liquidity needs. In March, …

Iceland: Kaupthing Emergency Liquidity Program, 2008, Sophia Alden, Léo Brougher

Journal of Financial Crises

Following the privatization of Iceland’s state-owned banks between 1998 and 2003, the three largest banks in Iceland—Glitnir, Landsbanki, and Kaupthing—grew rapidly, with consolidated assets increasing from 100% of Iceland’s GDP in 2004 to nearly 900% by the end of 2007. Initially, this growth was funded by debt issuances in the European medium-term note market; however, as cracks in the international financial system appeared in 2006, the banks turned to offering high-interest savings accounts through their foreign subsidiaries. Beginning in October 2006, Kaupthing launched “Kaupthing Edge,” an online savings and deposit platform operating in markets outside Iceland. When the United States …

Germany: Ikb Deutsche Industriebank Emergency Liquidity Program, 2008, Ayodeji George, Sophia Alden

Journal of Financial Crises

In the summer of 2007, IKB Deutsche Industriebank (IKB) faced heavy losses owing to the liquidity support it had provided on commercial paper issued by Rhineland Funding Capital Corporation, its off-balance-sheet vehicle, which held distressed collateralized debt obligations backed by US subprime mortgages. In July 2007, authorities became aware that IKB itself had lost access to liquidity from Deutsche Bank and other funding partners. Publicly owned development bank Kreditanstalt für Wiederaufbau (KfW) held a 38% stake in IKB, exposing it to potentially heavy losses in the event of an IKB failure. KfW, German financial authorities, and German banks pursued a …

Does Central Bank Transparency Curb Foreign Exchange Vulnerability?, Muhammad Aftab, Kate Phylaktis

CBER Conference

This study examines the relationship between central bank transparency (CBT) and foreign exchange market vulnerability, focusing on exchange market pressure (EMP) to provide a comprehensive understanding. Using panel bounds testing approach to cointegration based analysis, the study covers both developed and emerging markets, incorporating the global financial crisis (GFC) and various control variables. External policy uncertainty and FX regimes are also considered to elucidate the nuanced relationship between CBT and EMP. Findings reveal that improved CBT reduces EMP, with financial development moderating this effect, suggesting well-developed financial systems lead to more stable exchange markets. CBT consistently relieves EMP during both …

United States: Citigroup Capital Injection, 2008, Benjamin Hoffner, Vincient Arnold

Journal of Financial Crises

During the first three weeks of November 2008, Citigroup’s stock price dropped almost 80%, and its credit default swap spreads spiked as the market lost confidence in the bank’s ability to honor its commitments. Counterparties pulled away, and regulators determined Citi’s failure would constitute a systemic risk. On November 23, 2008, the Treasury, Federal Reserve Board, and Federal Deposit Insurance Corporation announced a package of measures to rescue Citi, which included an Asset Guarantee Program (AGP) to cover $306 billion in Citi’s assets and an ad hoc capital injection—the Targeted Investment Program (TIP). Under the guarantee, Citi would absorb the …

United States: Bank Of America Capital Injection, 2009, Benjamin Hoffner, Vincient Arnold

Journal of Financial Crises

On September 15, 2008, Bank of America (BofA) announced a merger with the investment bank Merrill Lynch. In December, BofA learned that Merrill Lynch had experienced large, unexpected losses amounting to $15.5 billion during the fourth quarter of 2008. In light of these losses, BofA’s CEO informed the US Treasury secretary and Federal Reserve chairman that BofA intended to invoke the material adverse change clause of the merger agreement, allowing for a renegotiation of, or escape from, the merger. Officials at the Fed and Treasury warned BofA that a failure of the merger would have adverse consequences for BofA and …

Switzerland: Ubs Capital Injection, 2008, Anmol Makhija

Journal of Financial Crises

UBS, the eighth-largest bank in the world and the largest bank in Switzerland in 2008, incurred write-downs totaling USD 50 billion during the Global Financial Crisis, mostly on exposures to securities linked to US subprime mortgages. On October 16, 2008, the Swiss Federal Council announced that the government would subscribe to CHF 6 billion (USD 5.3 billion) of mandatory convertible notes (MCNs) issued by UBS to restore confidence in the bank and the financial system. UBS agreed to use the government’s capital to fund the equity for a special purpose vehicle, StabFund, that the central bank created to take over …

India: Yes Bank Capital Injection, 2020, Salil Gupta

Journal of Financial Crises

In March 2020, the Reserve Bank of India (RBI) helped engineer a capital injection and restructuring of Yes Bank, India’s fourth-largest private sector bank, to prevent a run on the bank and to preserve broader financial stability. On March 14, 2020, Yes Bank received a total capital injection of 100 billion Indian rupees (INR; USD 1.34 billion) in total from the State Bank of India and a group of private sector banks (HDFC, ICICI Bank, Axis Bank, Kotak Mahindra Bank, Federal Bank, Bandhan Bank, IDFC First Bank). The government-owned SBI received a 48.2% equity stake, committing to contribute up to …

Belgium: Fortis Group Capital Injection, 2008, Ayodeji George

Journal of Financial Crises

In September 2008, in the wake of the freezing of credit markets caused by the Global Financial Crisis (GFC), Fortis Group, a financial conglomerate incorporated in Belgium and the Netherlands, faced depositor runs and share price deterioration. These negative consequences were a result of its exposures to US subprime mortgage-related assets and other losses from its 2007 acquisition of ABN AMRO, a large Dutch bank. Over the weekend of September 27–29, authorities from Belgium, the Netherlands, Luxembourg, and the European Central Bank (ECB) held emergency talks, resulting in the announcement of EUR 11.2 billion (USD 14.3 billion) in capital injections …

Impact Of Crises On Indian Financial Markets, Pami Dua, Divya Tuteja

Bulletin of Monetary Economics and Banking

We investigate the effect of crises on Indian financial markets including the short-term and medium-term money, government securities segments, equity and currency markets. Specifically, we study the effects of the COVID-19 pandemic, the Eurozone Sovereign Debt Crisis and the Global Financial Crisis on market returns, volatility and cross-correlations. We employ a (a) vector autoregressive model to analyse the effects of those shocks on returns and (b) multivariate ADCC-GARCH specification to examine the impact on conditional volatility and dynamic conditional correlation in the markets. We find significant effect of the Global Financial Crisis and the pandemic on the dynamics of the …

Lessons Learned: Deborah Perelmuter, Mercedes Cardona

Journal of Financial Crises

Deborah Perelmuter has spent more than three decades with the Federal Reserve System. In 2008, as senior vice president at the Federal Reserve Bank of New York (FRBNY) and co-head of Capital Markets Analysis and Trading (CMAT) within the Markets Group, she was tasked with setting up the operational details of the Term Securities Lending Facility (TSLF). The TSLF auctioned Treasury securities to primary dealers in exchange for less liquid collateral to provide liquidity to those firms during the Global Financial Crisis of 2007–2009. Perelmuter became senior financial stability adviser within the office of the director in the FRBNY’s Research …

Lessons Learned: Patrick Honohan, Maryann Haggerty

Journal of Financial Crises

Patrick Honohan, an economist, was governor of the Central Bank of Ireland and a member of the Governing Council of the European Central Bank (ECB) from September 2009 until November 2015. Early in his tenure, he led a team that investigated the causes of the Irish banking crisis that broke out in 2008 during the Global Financial Crisis. Resolving the problems of bank failure and over-indebtedness that emerged in that crisis dominated his term of office. In late 2010, Ireland had to request financial assistance from the “troika” of the International Monetary Fund (IMF), the European Commission, and the European …

Lessons Learned: Andrew Gray, Mercedes Cardona

Journal of Financial Crises

Andrew Gray joined the FDIC in 2007, after having been majority director of communications for the US Senate Committee on Banking, Housing, and Urban Affairs and press secretary for US Senator Richard C. Shelby (R–AL). Gray’s initial project was a campaign to mark the 75th anniversary of the creation of the Federal Deposit Insurance Corporation (FDIC); his role evolved into running crisis communications as the FDIC stepped in during several bank failures triggered by the Global Financial Crisis (GFC) and conducted 489 bank resolutions during 2008–2013. After the crisis, the FDIC also assumed new responsibilities over the winding down of …

Peru: Reserve Requirements, Gfc, Sean Fulmer, Bailey Decker

Journal of Financial Crises

Peru experienced the Global Financial Crisis of 2007–2009 (GFC) in two distinct phases. First, starting in the summer of 2007, record capital inflows to the Peru banking sector contributed to an overheating economy. The Banco Central de Reserva del Perú (BCRP) responded in September 2007 by removing reserve requirements on long-term external credit to promote long-term, rather than short-term, capital inflows. In February 2008, for similar reasons, it began to raise the ordinary minimum reserve requirement on bank liabilities and implemented new marginal reserve requirements on increases in those liabilities. Second, when the collapse of the US investment bank Lehman …

Jamaica: Reserve Requirements, Gfc, Corey N. Runkel

Journal of Financial Crises

In October 2008, the Global Financial Crisis (GFC) and liquidity shortages rocked American and European markets, causing investors to exit liquid Jamaican-dollar assets. The Bank of Jamaica (BOJ) feared a “disorderly depreciation” in the Jamaican-dollar (JMD) exchange rate to the US dollar (BOJ 2009, 44). In response, the BOJ raised required reserve ratios for cash and other liquid assets, the first increases since 2002. The BOJ raised reserve ratios three times—in December 2008, January 2009, and February 2009—because the central bank could not change its requirements by more than 200 basis points per month. The BOJ raised the requirement for …

Ireland: Credit Institution (Financial Support) Scheme, 2008, Stella Schaefer-Brown

Journal of Financial Crises

The Global Financial Crisis exposed fragilities in the Irish banking system and led to widespread runs on Irish banks. Irish authorities attempted to address the runs on September 22, 2008, by increasing the country’s deposit guarantee limit from EUR 20,000 to EUR 100,000 (USD 28,800 to USD 140,000) and raising the coverage of deposits from 90% to 100%. When the runs continued, the Irish minister for finance announced a blanket guarantee of bank liabilities on September 30 without consulting European Union authorities. The announcement specified the blanket guarantee would be effective immediately and remain in effect for two years. The …

Denmark: General Guarantee Scheme, 2008, Benjamin Hoffner

Journal of Financial Crises

As foreign credit in Denmark dried up during the summer of 2008, Danish banks became increasingly reliant on short-term borrowing. The government took over the failing Roskilde Bank, the country’s eighth-largest bank, in late August. On October 5, 2008, the government announced a voluntary General Guarantee Scheme to fully insure deposits and other senior liabilities of participating banks. Banks could participate in the scheme by becoming members of the financial sector’s banking consortium, Det Private Beredskab, or in English, the Private Contingency Association (PCA), before October 13, 2008. The General Guarantee Scheme fully insured all depositors and senior unsecured creditors …

Lessons Learned: Steven Rattner, Mary Anne Chute Lynch

Journal of Financial Crises

Steven Rattner, an investment banker and private equity professional, joined the Obama administration as counselor to the Secretary of the Treasury and head of the Obama administration’s Task Force on the Auto Industry, which was charged with providing aid to Chrysler and General Motors, and later to other entities, to avoid their disorderly failure and the loss of a million or more jobs. The Auto Task Force worked intensely throughout 2009 to swiftly negotiate with the corporate leadership, unions, investors, and other stakeholders of the two manufacturers to design an orderly restructuring that would put the companies on a path …

Lessons Learned: Harry Wilson, Mary Anne Chute Lynch

Journal of Financial Crises

Harry Wilson was one of four senior advisers to the US Department of the Treasury during the Obama administration and served on the President’s Task Force on the Auto Industry, which was established in 2009 and charged with providing aid to General Motors and Chrysler, and later to other entities, to avoid their disorderly failure and the loss of a million or more jobs. The Auto Task Force worked intensively throughout 2009 to swiftly negotiate with the corporate leadership, unions, investors, and other stakeholders of the two manufacturers to design an orderly restructuring that would put the companies on a …

Lessons Learned: Mara Mcneill, Mary Anne Chute Lynch

Journal of Financial Crises

Mara McNeill was senior counsel to the US Department of the Treasury on the Obama administration’s Automotive Investment Financing Program (AIFP) during the Global Financial Crisis (GFC) of 2007–09. As senior counsel, McNeill was responsible for the department’s $80 billon financing of General Motors, Chrysler, Ally Financial, and Chrysler Financial. She worked with the Auto Team Task Force, the Troubled Assets Relief Program (TARP) legal team, and the Department of Treasury. The bipartisan AIFP team was charged with overseeing the government’s efforts to assist the companies toward a “new lease on life,” while exercising strong financial principles to protect the …

Lessons Learned: Matthew Feldman, Mary Anne Chute Lynch

Journal of Financial Crises

Matthew Feldman was the chief legal advisor to the Department of the Treasury on the Obama administration’s Task Force on the Auto Industry, which was established in 2009 and charged with providing aid to Chrysler and General Motors (GM), and later other entities, to avoid their disorderly failure and the loss of a million or more jobs. The Auto Task Force worked intensively throughout 2009 to swiftly negotiate with corporate leadership, unions, investors, and other stakeholders of the two manufacturers to design an orderly restructuring that would put the companies on a path to stability. Treasury Secretary Timothy Geithner recognized …

Lessons Learned: Sadiq Malik, Mary Anne Chute Lynch

Journal of Financial Crises

Sadiq Malik was a member of the Obama administration’s Task Force on the Auto Industry, which was established in 2009 and charged with providing aid to Chrysler and General Motors, and later to other entities, to avoid their disorderly failure and the loss of a million or more jobs. The Auto Task Force worked intensively throughout 2009 to swiftly negotiate with the corporate leadership, unions, investors, and other stakeholders of the two manufacturers, to design an orderly restructuring that would put the companies on a path to stability. Malik, working for the Auto Task Force, helped take General Motors through …

Lessons Learned: Ron Bloom, Mary Anne Chute Lynch

Journal of Financial Crises

Ron Bloom served as senior adviser to Secretary of the Treasury Timothy Geithner on President Barack Obama’s Task Force on the Automotive Industry and as assistant to the president for manufacturing policy (2009–2011). As senior adviser on the Auto Task Force team, Bloom helped lead the restructuring of General Motors and Chrysler LLC. Subsequently, he advised the Obama administration with policy development and strategic planning to revitalize the manufacturing sector. Bloom brought to Treasury his unique experience working with organized labor (including the United Steelworkers Union, United Auto Workers, the Teamsters, the Air Line Pilots Association), and in the investment …

Lessons Learned: Andreas Lehnert, Mercedes Cardona

Journal of Financial Crises

Andreas Lehnert was chief of the Federal Reserve’s Household and Real Estate Finance Section at the onset of the Global Financial Crisis of 2007–09 (GFC) and played a key role in implementing the Fed’s research and policy agenda on financial stability. He developed and helped run the Fed’s first regulatory bank stress tests in 2009, and in 2010 played a role in launching the Office of Financial Stability Policy and Research, which became the Division of Financial Stability. This “Lessons Learned” is based on an interview with Mr. Lehnert.