The impact of assets write-downs on banks´ share price: The case of subprime mortgages and leveraged loans

Domenico Tripodi & Benjamin Mayr

Studenteropgave: Kandidatafhandlinger


The global financial markets experienced a trend reversal in August 2007 which led to a drastic slow down in the first stage, and later to a recession in the global economy. During the summer 2007, the global financial markets started to realize the consequence of home loans defaults in their structured portfolios. That was just the beginning of the current global crisis. When the housing bubble started to deflate, more and more foreclosures appeared. As we will see, this had a domino effect given the nature of securitization of mortgage loans. Banks experienced huge losses due to asset write-downs in their structured portfolios. The whole financial system is in troubles. The write-downs and losses extended to the whole system due to repackaging and financial markets globalization. What was a crisis limited to one industry in the US is driving several national economies into recession. The following Master Thesis treats an aspect of the current financial markets hot topic. What we have focused on is the root of the crisis, poor financial risk management. We demonstrate how an imprecise assessment of credit risk may change the value of debt and as a consequence of banks assets. In particular we stressed the strong link between risk and return. We used various models to show how the risk assessment affects the value of the debt and how risk can come in different forms, as standalone or as portfolio risk. What we found out is that, some of the risk management principles have been ignored. In particular, the basic risk-return principle has been violated. We can confidently say that mispriced risk was the initial cause of the financial crisis. We also looked at the market reaction to the asset write-downs and the credit risk discovery in a period between Quarter 3 2007 and Quarter 2 2008. The stock market had a general negative reaction. However, until that time, market participants did not understand the system write downs and the domino effect which was to come after. Finally, we have a positive comment on the current actions taken to recapitalize banks and stimulate the economy. Furthermore, we propose some longer term measures. We briefly focus on some regulatory measure, but even before defining the regulation frame. We think that we need to reconceptualise the financial sector. If we slow down for second and think about that, we would probably agree on the following: a good financial sector is focused on serving the business. Lending to the business sector must be one, if not the main, role of the financial sector. We hope you will enjoy reading this Master Thesis.

UddannelserCand.merc.fsm Finance and Strategic Management, (Kandidatuddannelse) Afsluttende afhandling
Antal sider110