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Credit Crisis in 30 slides
- 2. ........a Bank is a Credit Intermediary – or “Middleman” £ £ Bank Borrower Depositor
- 3. But rather than lending pre-existing money, it creates new money as interest–bearing credit….
- 5. Now, if you think about it, a Bank’s true economic function.....
- 6. … is to guarantee that the borrowers’ credit is good…
- 10. ..and a profit to Investors normally results Interest Interest Costs Investors Bank Borrowers Depositors
- 13. … .that Banks began to “outsource” their guarantee to rid themselves of risk.
- 14. … and thus allow their Equity to support more credit creation
- 16. … temporarily – with “Credit Derivatives” (a time-limited guarantee)….
- 17. … and partially – using credit insurance from insurers such as AIG
- 18. The Result was a bigger Credit Pyramid than Banks alone could sustain… Investor Equity Credit Bank Equity
- 19. … and an opaque “shadow banking system” of Investors holding “sliced and diced” risk… Investor Equity Credit Bank Equity
- 22. ..but by now no-one knew where the Risk lay… Investor Equity Credit Bank Equity
- 26. The problem is not shortage of money - liquidity – Central Banks can handle that….
- 27. … ..it is shortage of Equity - a Solvency problem – which Central Banks cannot handle…..