How the Subprime Crisis Went Global: Evidence from Bank Credit Default Swap Spreads

34 Pages Posted: 20 Aug 2009 Last revised: 1 Dec 2011

See all articles by Barry Eichengreen

Barry Eichengreen

University of California, Berkeley; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Milan Nedeljkovic

FEFA - Faculty of Economics, Finance and Administration; CESifo (Center for Economic Studies and Ifo Institute)

Ashoka Mody

International Monetary Fund (IMF) - Research Department

Lucio Sarno

City University London - Sir John Cass Business School; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: August 2011

Abstract

How did the Subprime Crisis, a problem in a small corner of U.S. financial markets, affect the entire global banking system? To shed light on this question we use principal component analysis to identify common factors in the movement of banks’ credit default swap spreads. We find that fortunes of international banks rise and fall together even in normal times along with short-term global economic prospects. But the importance of common factors rose steadily to exceptional levels from the outbreak of the Subprime Crisis to past the rescue of Bear Stearns, reflecting a diffuse sense that funding and credit risk was increasing. Following the failure of Lehman Brothers, the interdependencies briefly increased to a new high, before they fell back to the pre-Lehman elevated levels - but now they more clearly reflected heightened funding and counterparty risk. After Lehman’s failure, the prospect of global recession became imminent, auguring the further deterioration of banks’ loan portfolios. At this point the entire global financial system had become infected.

Suggested Citation

Eichengreen, Barry and Nedeljkovic, Milan and Mody, Ashoka and Sarno, Lucio, How the Subprime Crisis Went Global: Evidence from Bank Credit Default Swap Spreads (August 2011). Available at SSRN: https://ssrn.com/abstract=1458042 or http://dx.doi.org/10.2139/ssrn.1458042

Barry Eichengreen

University of California, Berkeley ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Milan Nedeljkovic

FEFA - Faculty of Economics, Finance and Administration ( email )

Bulevar Zorana Djindjica 44
Belgrade, +381
Serbia

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Ashoka Mody

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-9617 (Phone)
202-589-9617 (Fax)

HOME PAGE: http://www.amody.com

Lucio Sarno (Contact Author)

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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