The impact of the subprime-crisis on european banks

Table of Contents

1 Introduction

1.1 Motivation and Objective

1.2 Course of the Investigation

2 Fundamentals of the Subprime-Crisis

2.1 The US Housing and Subprime Mortgage Market

2.2 Characteristics of Subprime Mortgages

2.3 Business Model of US Mortgage Brokers

2.4 Financial Instruments Underlying the Subprime-Crisis

2.5 Consequences of the Fragmented Securitization Process

3 The Development of the Subprime-Crisis

3.1 Situation of the US Housing Market up to 2007

3.2 Timeline of the Subprime-Crisis in 2007

3.3 Spillover Effects from the Mortgage Market to the Global Capital Markets

3.4 Consequences for the British Banking Market

4 Empirical Analysis About the Subprime-Crisis

4.1 History and Overview of Event Studies

4.2 Framework of an Event Study

4.3 Selection of Relevant Data

4.3.1 British Banks and Market Index

4.3.2 News about Private Financial Institutions and Central Banks

4.4 Event Study About the Subprime-Crisis

4.4.1 Event Study Methodology

4.4.2 Formulation and Testing of Hypotheses

4.4.3 Interpretation of Results

4.5 Year-round Performance of the British Banking Sector in 2007

5 Summary and Conclusion

Objectives and Key Themes

This thesis examines the impact of the US subprime crisis on the British banking sector, investigating both short-term market reactions through an event study and long-term performance shifts throughout the year 2007.

• The evolution and underlying mechanics of the US subprime mortgage market and its securitization processes.
• Chronological development of the subprime crisis and its spillover effects into global financial markets.
• Specific consequences for British financial institutions, including the liquidity crisis and bank runs.
• Empirical event study methodology analyzing stock market reactions to subprime-related news.
• Comparative performance analysis of a bank-focused portfolio versus a diversified alternative portfolio in 2007.

Excerpt from the Book

Summary of Chapters

1 Introduction: Defines the scope of the thesis, establishing the motivation behind analyzing the impact of the US subprime crisis on British banks.

2 Fundamentals of the Subprime-Crisis: Explores the origins of subprime mortgages, the brokers' business models, and the role of securitization in creating high-risk financial instruments.

3 The Development of the Subprime-Crisis: Provides a comprehensive timeline of 2007, detailing the deterioration of the US housing market and the resulting spillover effects on international banks, specifically Northern Rock.

4 Empirical Analysis About the Subprime-Crisis: Details the quantitative approach, using event study methodology and portfolio performance comparisons to measure the crisis's impact on British equity.

5 Summary and Conclusion: Synthesizes the theoretical and empirical findings, confirming that the British banking sector significantly underperformed during the crisis year of 2007.

Keywords

Subprime crisis, British banking market, Northern Rock, Securitization, Mortgage-backed securities, Event study, Liquidity crunch, Abnormal returns, US housing market, Credit risk, Financial contagion, Investment banking, Mortgage brokers, Capital markets, Risk-adjusted performance.

Frequently Asked Questions

What is the core focus of this research?

This thesis examines the impact of the US subprime mortgage crisis on the British banking market, focusing on how this external shock manifested in the UK through liquidity issues and equity performance.

What are the primary themes discussed?

The study covers the history of the US subprime market, the mechanics of securitization (MBS/CDOs), the contagion effects on global and British financial institutions, and the empirical measurement of stock market reactions.

What is the primary objective of this thesis?

The primary objective is to empirically determine if the subprime crisis caused significant short-term stock price reactions in the British banking sector and to compare the annual performance of bank stocks against broader, diversified market alternatives.

Which methodology is applied in the empirical analysis?

The study utilizes two primary empirical approaches: an event study using daily abnormal stock returns and a comparative year-round performance analysis using portfolio risk and return metrics.

What does the main body cover?

The main body details the evolution of the subprime crisis, specific financial instruments like ABCPs and CDOs, the collapse and bailout of Northern Rock, and the results of regression and performance modeling.

Which key terms characterize the study?

The study is characterized by terms such as securitization, liquidity crunch, event study, subprime mortgages, abnormal returns, and bank contagion.

Why was the British banking market specifically chosen for analysis?

The British banking market was chosen because it experienced uniquely severe consequences, including major asset write-downs and the first bank run in Europe in decades, making it a critical case study for crisis impact.

What was the outcome regarding the event study results?

The event study failed to prove a statistically significant relationship between the subprime-related news and short-term stock price movements, which the author attributes to the clustering of news and overlapping event windows.