2007–12: The Crisis Years

Abstract

On 9 August 2007, an asset-management unit linked to France’s largest bank BNP Paribas announced that it was ceasing its activity in three US hedge funds specialising in US mortgage debt. The same day, the European Central Bank (ECB) confirmed that it would provide as much funding as banks needed to counter ‘tensions in the euro money markets’.¹ These moves sparked a realisation by banks around the world that, as US interest rates rose in the wake of high oil prices, the ‘innovative’ financial products they had been buying, interwoven with slices of US sub-prime mortgage debt, were far riskier than they once seemed; certainly riskier than the triple A ratings most of them had been awarded by the international credit rating agencies. Since no one knew how to disentangle these complex products or how many of them other banks were holding, the realisation quickly led to panic selling and a breakdown of trust between the banks, threatening a total banking market seizure. The first phase of the global financial crisis had begun.