07-06-2016, 01:55 PM
What we do know—and this is useful information—is that European bank stocks (measured by the bank component of the Stoxx Europe 600) plunged by more than 20 percent (over two days) following the outcome of the referendum. More broadly, as of July 1, 2016, European bank stock prices were down by nearly one third since the start of the year and by more than 75 percent since peaking in 2007. This suggests that capital in the European banking system is scarce; too scarce, in fact, to be confident about financial stability.
Brexit and Systemic Risk — Money, Banking and Financial Markets
More precisely, SRISK is an estimate of the aggregate shortfall of capital in the financial system in the event of a crisis (defined as a large—in this case, 40%—drop of the global equity market over the next six months). Analogous to stress tests, the idea behind SRISK is that an intermediary contributes to systemic risk to the extent that it is short of capital at the same time that a system-wide shortfall occurs (see, for example, here). It is precisely in such system-wide capital droughts that funding liquidity becomes most precarious, leading to damaging fire sales.
Brexit and Systemic Risk — Money, Banking and Financial Markets
Within days, Northern Rock, the first UK lender to embrace mortgage securitisation, called the FSA to say it had a liquidity problem. The biggest financial crisis for nearly a century was under way. Almost nine years since that fateful day, and the ghost of Bear Stearns is stalking the Square Mile again after the lockdown of two of the UK’s biggest property funds.
Property market turmoil has eerie echoes of start of financial crisi
However, investors have been spooked once again after insurance giants Standard Life, Aviva and M&G, froze redemptions in their retail property funds. While these funds are only suspended for an initial 28 days, a spate of so-called “gatings” in the space of less than 24 hours, has spread panic in the markets. When an open-ended property fund such as these is forced to take such drastic action, it essentially means that the outflows are so large that they don’t have the liquidity to return cash to investors.
Property market turmoil has eerie echoes of start of financial crisis