The Big Financial Crisis

Paul Collazos

This article was first published as a chapter in Basel III and Beyond on July 27, 2011, by Risk Books.

This chapter analyses the origins and dynamics of the financial crisis that erupted in 2007 and led to a deep rethinking of the regulatory framework at international level. The discussion focuses on both the financial practices that contributed to the financial turmoil and their macroeconomic context.

There are various estimates of the length of the financial crisis.¹¹ For instance, the “heat map” produced by the International Monetary Fund (IMF) (2010b) shows that, in certain markets, the period of excessive price volatility (greater than nine standard deviations) continued since March 2007 until late 2010. The Bank for International Settlements (2009) identifies five stages of the crisis, covering from June 2007 to mid-March 2009. The Bank of England (2009a) report the key events of the crisis occurred between spring 2007 and summer 2009. This chapter defines the big financial crisis as the period from the first announcements of write-offs in subprime assets²² Subprime assets not only comprise mortgage loans to borrowers with poor or bad credit records but also securities