How did a Domestic Housing Slump Turn into a Global Financial Crisis?

67 Pages Posted: 7 Apr 2010

See all articles by Steven B. Kamin

Steven B. Kamin

Board of Governors of the Federal Reserve System

Laurie Pounder

Federal Reserve Board

Date Written: March 25, 2010


The global financial crisis clearly started with problems in the U.S. subprime sector and spread across the world from there. But was the direct exposure of foreigners to the U.S. financial system a key driver of the crisis, or did other factors account for its rapid contagion across the world? To answer this question, we assessed whether countries that held large amounts of U.S. mortgage-backed securities (MBS) and were highly dependent on dollar funding experienced a greater degree of financial distress during the crisis. We found little evidence of such direct contagion from the United States to abroad. Although CDS spreads generally rose higher and bank stocks generally fell lower in countries with more exposure to U.S. MBS and greater dollar funding needs, these correlations were not robust, and they fail to explain the lion's share of the deterioration in asset prices that took place during the crisis. Accordingly, channels of indirect contagion may have played a more important role in the global spread of the crisis: a generalized run on global financial institutions, given the opacity of their balance sheets; excessive dependence on short-term funding; vicious cycles of mark-to-market losses driving fire sales of MBS; the realization that financial firms around the world were pursuing similar (flawed) business models; and global swings in risk aversion. The U.S. subprime crisis, rather than being a fundamental driver of the global crisis, may have been merely a trigger for a global bank run and for disillusionment with a risky business model that already had spread around the world.

Keywords: Financial crisis, transmission, mortgage-backed securities

JEL Classification: F36, F40

Suggested Citation

Kamin, Steven B. and Pounder, Laurie, How did a Domestic Housing Slump Turn into a Global Financial Crisis? (March 25, 2010). FRB International Finance Discussion Paper No. 994. Available at SSRN: or

Steven B. Kamin (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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Laurie Pounder

Federal Reserve Board

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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