4 Vulnerabilities in the Credit Crisis

The April 2008 Global Financial Stability Report (pdf file) assesses the vulnerabilities that the system is facing and offers tentative conclusions and policy lessons. Some key themes that emerge from this analysis include:

• There was a collective failure to appreciate the extent of leverage taken on by a wide range of institutions—banks, monoline insurers, government-sponsored entities, hedge funds—and the associated risks of a disorderly unwinding.
• Private sector risk management, disclosure, financial sector supervision, and regulation all lagged behind the rapid innovation and shifts in business models, leaving scope for excessive risk-taking, weak underwriting, maturity mismatches, and asset price inflation.
• The transfer of risks off bank balance sheets was overestimated. As risks have materialized, this has placed enormous pressures back on the balance sheets of banks.
• Notwithstanding unprecedented intervention by major central banks, financial markets remain under considerable strain, now compounded by a more worrisome macroeconomic environment, weakly capitalized institutions, and broad-based deleveraging.

Sources:

Global Financial Stability Report, full text
Global Financial Stability Report, exec summary
Reports of the crunch of credit greatly exaggerated?
Credit crunch costs ‘$1 trillion’

Details of mark to market losses [click to enlarge]: