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Cyprus has agreed a 10bn euros bailout with the European Union and the International Monetary Fund (IMF) in an attempt to stave off the collapse of its banking sector and the wider economy.
What has been agreed?
Cyprus has agreed to a significant restructuring of its banking sector, along with other measures such as tax rises and privatisations. The measures are designed to raise billions towards the bailout, but protect bank customers with deposits of 100,000 euros or less.

Cyprus's second largest bank - Laiki Bank - will be closed down and deposits above 100,000 euros moved into a "bad bank". Deposits below 100,000 euros will be moved into Bank of Cyprus, the country's biggest bank, which is being significantly restructured.

Deposits at Bank of Cyprus of more than 100,000 euros are being frozen.

At both banks, deposits above 100,000 euros will be used by the government to contribute billions towards the bailout. It is not clear how much of the money will be taken, but a government spokesman has suggested customers should expect about 40% of the balance to be converted into bank shares.
What about the bank levy?
In the original EU-IMF deal, all customers of Cypriot banks were to face a one-off tax on their deposits, starting at 6.75% for the smallest deposits.

That was designed to raise 5.8bn euros towards the cost of the bailout. But it proved hugely unpopular with the Cypriot public and was voted down by Cyprus's parliament.

There is no bank levy in the new deal, but the bank restructuring measures mean deposits over 100,000 euros will effectively be used to pay the bulk of the 5.8bn euro bill.

The measures cannot be voted down by Cyprus's parliament, as new bank restructuring laws have already been agreed and voted through by MPs.
Why are there capital controls?
After being closed for almost two weeks, Cyprus' banks have reopened - but with strict controls on how much money can be withdrawn.

This is to prevent a bank run, where customers try to withdraw all their money at once due to a lack of confidence in the banking sector. In the past, bank runs have caused banks to collapse.

In Cyprus, customers are limited to withdrawing 300 euros a day, taking no more than 1,000 euros in cash on trips out of the country, and transferring no more than 5,000 euros a month on debit or credit cards.

Bigger transactions need the approval of Cypriot authorities.

The measures were due to stay in place for just a few days, but Cypriot authorities are already indicating that they are likely to keep them in place for longer. Iceland introduced temporary capital controls in 2008, which are still in place today.
Are the UK operations of Cypriot banks affected?
Bank of Cyprus UK has 50,000 UK customers. Although it is a subsidiary of Bank of Cyprus, it is a separately incorporated UK bank and depositors are protected by the UK's Financial Services Compensation Scheme (FSCS), which covers savings up to £85,000. It said the crisis in Cyprus would have no effect on its deposits.

Laiki Bank has four branches in Britain and serves 13,000 customers.

Unlike Bank of Cyprus UK, its UK operations are directly controlled from Cyprus, and so are not covered by the FSCS. It says deposits up to 100,000 euros are guaranteed and customers are free to make withdraws if they wish.

However, the UK Finance Minister, George Osborne, says the UK government is in talks with Cypriot authorities to find "a British solution" to Laiki's UK branches.
So is the crisis over?
Not necessarily. In the short term, the risk of the Cypriot banking sector collapsing has receded, and the bailout funds will allow the government to pay its own debts and undertake the restructuring of the banks without facing economic collapse or exiting the euro.

But in other respects the outlook is less certain. Cyprus must enact tough austerity measures to rebuild its economy, and regain trust among investors in its banking sector and government. It is unclear whether the Cypriot public, angered by how the crisis has been handled so far, will support that.

It is also unclear how much trust is left in Cyprus's banks, and so when fears over a bank run will recede.

Finally, the whole episode has damaged confidence in European authorities' ability to handle economic crises.
What went wrong in Cyprus?
Before the financial crisis struck in 2008, Cyprus was seen to have a healthy economy, with high growth, low unemployment and sound public finances.

But during the good years, the island's banking sector grew rapidly. By 2011, the IMF reported that their assets - which include all the loans they have made - were equivalent to 835% of annual national income, or GDP. A chunk of that is down to foreign-owned banks, but those that are Cypriot had made loans to Greek borrowers worth 160% of Cypriot GDP.

When Greece became engulfed in crisis in 2010, Cypriot banks were hit hard, and the government did not have the money to bail them out itself. Government finances have been further weakened by slow economic growth and international lenders have stopped offering loans.

Negotiations on a bailout with the EU were delayed by the previous socialist government. President Nicos Anastasiades, a conservative who favoured a swift agreement with Europe, assumed office in late February.
Why was a bank levy considered?
When countries get an international bailout, they are often expected to contribute to the solution by raising funds themselves, usually by increasing taxes or selling state-owned assets.

The levy on bank deposits was designed to play the same role. It was intended to reduce the size of the bailout and therefore the amount of new debt Cyprus had to take on.

But there is almost certainly a political aspect, too. In the eurozone, there are concerns about money-laundering in Cyprus and the presence of large amounts of Russian-owned money in the banks. Germany is reputed to be especially unhappy about the idea of using European taxpayers' money to rescue them.

Experts say the decision to target ordinary savers came about because Cypriot banks have fewer private bondholders than banks in other eurozone countries. In the Greek bailout, it was private bondholders who had to take a "haircut" - a slice out of their investment.

However, the deal provoked outrage in Cyprus, parliament promptly voted against it, and it is increasingly seen as a blunder by European and Cypriot authorities.

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Cyprus has agreed a 10bn euros bailout with the European Union and the International Monetary Fund (IMF) in an attempt to stave off the collapse of its banking sector and the wider economy. What has been agreed? Cyprus has agreed to a significant restructuring of its banking sector, along with other measures such as tax rises and privatisations.

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U.S. mortgage delinquency rate for subprime conventional loans 2015 | Statistic

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This statistic presents the mortgage delinquency rates for subprime conventional loans in the United States from 2000 to 2015. The mortgage delinquency rate for subprime conventional loans in the United States amounted to 16.5 percent in 2015.

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2hrs 49mins

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The Financial Crisis & Public Debts Explained In Detail

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Global Financial Meltdown - One Of The Best Financial Crisis Documentary Films

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Meltdown is a four-part investigation into a world of greed and recklessness that brought down the financial world. The show begins with the 2008 crash that pushed 30 million people into unemployment, brought countries to the edge of insolvency and turned the clock back to 1929. But how did it all go so wrong?

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How Lehman Brothers Busted the World Economy I Episode 02

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www.thevisionmedia.com Lehman Brothers filed for Chapter 11 bankruptcy protection on September 15, 2008. The bankruptcy of Lehman Brothers remains the largest bankruptcy filing in U.S. history with Lehman holding over $600 billion in assets.

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20 mins

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POR AMOR AL DINERO Documental El colapso de Lehman Brothers

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The Fall of Lehman Brothers P1   YouTube

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The Big Short - "Jenga" Clip (2015) - Paramount Pictures

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When four outsiders saw what the big banks, media and government refused to, the global collapse of the economy, they had an idea: The Big Short. Their bold investment leads them into the dark underbelly of modern banking where they must question everyone and everything.

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Cocos Definition from Financial Times Lexicon

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CoCos are different to existing hybrids because they are designed to convert into shares if a pre-set trigger is breached in order to provide a shock boost to capital levels and reassure investors more generally. Hybrids, including CoCos, contain features of both debt and equity.

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Deutsche Bank is under the most pressure a major lender has faced since the 2008 financial crisis. Many, however, trace its woes back beyond the banking crash, as Joe Miller writes:

On a cold November morning in 1989, Alfred Herrhausen left his house in the Hessian town of Bad Homburg, climbed into his chauffeur-driven Mercedes-Benz, and settled in for the routine journey to his Frankfurt office.

A few minutes later, he was dead.

As the head of West Germany's largest lender, Deutsche Bank, Mr Herrhausen had been a target of the anti-capitalist, radical-left Red Army Faction.

They claimed to have planted the remote-control bomb that blew his armoured limousine a few metres into the air.

The group opposed the 59-year-old banker's "imperial" ambitions: his advocacy of closer European integration, his counsel of then-Chancellor Helmut Kohl, and his championing of economic internationalism.

But although the attackers succeeded in taking Mr Herrhausen's life, they could not extinguish his unique vision, one that paved the way for Deutsche Bank's soaring success in the Nineties and through the new millennium, and one that may have sown the seeds of its recent decline.

'Imperial ambitions'

Just three weeks before the attack, Deutsche, which for decades focused on servicing Germany's home-grown industrial heavyweights, had made its first foray into the heady world of investment banking, by buying the British merchant bank Morgan Grenfell.

The acquisition, masterminded by Mr Herrhausen, was designed to catapult Deutsche to the top of the global banking ladder, and to broaden the institution's reach beyond Germany's - and indeed Europe's - borders.

What Mr Herrhausen had realised was that the German market, "dominated by savings and co-operative banks, and not-for-profit institutions, was no place for a private bank to grow," explains Deutsche Bank's former chief economist, Prof Thomas Mayer.

What's more, as the West German economy boomed in the lead-up to reunification, the likes of Siemens, Daimler and Volkswagen, some of Deutsche's biggest clients, were looking for access to capital markets on which to issue corporate bonds, rather than relying on more traditional banking services.

In the following years, in an attempt to beef-up its international offering, Deutsche spent billions of dollars on poaching the best talent from American titans such as Merrill Lynch - including Anshu Jain, who went on to spearhead the bank's global expansion until his resignation last year amid serious accusations of wrongdoing in the lender's investment unit. Mr Jain himself was subsequently cleared by regulatory investigations.

Such was the culture change, that, as legend has it, Deutsche's name had to be spelt out phonetically on the signs in its London offices, as some of the foreign employees charged with diversifying the bank's operations had trouble with German pronunciation.

The new recruits were, by design, cut from a different cloth than Deutsche's German employees. Mr Herrhausen had talked of bringing an "Anglo-Saxon" financial culture to the bank, with the hope that they would inject some Wall Street bravado to the rather conservative, staid organisation.

'Cut corners'

For at least a decade, the plan worked. Deutsche's profits soared, and its share-price rocketed. At one point, it was the sixth biggest bank in the world, as respected in Manhattan as it was in Munich.

Even in 2008, when the financial crisis led European stalwarts such as UBS and Credit Suisse to seek bailouts, Deutsche weathered the storm on its own.

But unlike those banks, who downsized in the wake of the global crash, Deutsche "missed the point where they needed to rebalance their business model," according to one financial journalist who has been scrutinising the company for years.

Deutsche has been accused of becoming more arrogant after surviving the downturn.

Predictably, the London and New York based financiers who transformed Deutsche into a global player were less risk-averse than their Frankfurt colleagues, and, as Prof Mayer alleges, they cut corners.

"You can attribute many of Deutsche's current problems to the army of investment bankers who joined in the 90s," he says. "They were given a mandate to push the bank into the investment banking league tables, and they took reputational risks.

"They were in the business of making money, and they did not proceed cautiously."

Deutsche, which now employs roughly 100,000 people across more than 70 countries, is paying a heavy price for those risks - in fact the second biggest since the financial crisis.

A whopping $14bn fine from the US Department of Justice for mis-selling mortgage backed securities, which isn't much less than the size of Deutsche's current market capitalisation, is just the latest penalty for a litany of misdeeds, including manipulating Libor rates and fixing gold prices.

Despite a famously impressive art collection, the bank has precious few assets left to help British chief executive John Cryan raise much needed capital.

Ironically, Deutsche, which paid billions of euros in bonuses to its star bankers even after suspending its dividend payments to shareholders, is struggling to keep key staff.

'World's most dangerous'

It is not just Deutsche's investors who are concerned. After more than 25 years of vigorous diversification, including a string of small acquisitions across the world, the bank's tentacles reach many parts of the global economy.

The IMF has called Deutsche the world's most dangerous bank, and as one insider explains "if Deutsche Bank goes down, everyone else has a problem too".

But although the German giant is in dire straits, its demise is anything but inevitable.

For one, there are now regulatory regimes in place, which mean that various bondholders and large depositors would suffer a haircut to help shore up the bank's balance sheets.

Additionally, the long shadow cast by the collapse of Lehman Brothers has left world leaders with little appetite for allowing another large lender to hit the buffers.

Nonetheless, a government bailout seems unlikely, at least in the very near future.

EU legislation makes it difficult for countries to inject cash into a failing financial institution without making sure investors take a hit first - a point Angela Merkel has been keen to make to the her Italian counterpart, Matteo Renzi, who was prevented from using Roman money to prop up the failing Monte dei Paschi di Siena bank.

Plus, as Prof Mayer explains, there is hardly any love left for the once-iconic bank among ordinary Germans, who tend to see the beleaguered lender as more of a national embarrassment.

Whatever Deutsche's fate, the almost 150-year old bank's rise and fall has served, as Prof Mayer puts it, to "refocus people's attention" on the problem that faced Alfred Herrhausen three decades ago - expansion inevitably comes with exposure.

"It was the right decision to go into investment business," the Deutsche veteran, who left the bank in 2012, insists.

"But there were difficulties in execution."

It is hard to know what Alfred Herrhausen would make of the mistakes made in pursuit of the mission he helped set in motion, and of Deutsche's prolonged failure to face up to its frailties.

But a clue to how he would handle the current crisis may lie in the inscription on the two memorial pillars erected on the site of the pioneering chief executive's murder.

A quote by Austrian poet Ingeborg Bachmann, it reads: "Die Wahrheit ist dem Menschen zumutbar."

"People," it translates, "can handle the truth."

Follow Joe Miller on Twitter @JoeMillerJr.

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Deutsche Bank is under the most pressure a major lender has faced since the 2008 financial crisis. Many, however, trace its woes back beyond the banking crash, as Joe Miller writes: On a cold November morning in 1989, Alfred Herrhausen left his house in the Hessian town of Bad Homburg, climbed into his chauffeur-driven Mercedes-Benz, and settled in for the routine journey to his Frankfurt office.

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Deutsche Banks woes in 5 charts | Companies

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Deutsche Bank is in serious trouble, with some hedge funds pulling business and the US Department of Justice seeking $14bn to settle its probe on mortgage securities. Why are people so worried about the bank's fate? FT's Martin Arnold explains in five charts.

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Wobbly Bridge

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How a wobbly bridge helps to explain financial instability | tutor2u Economics

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This is a superb short video from the LSE on the causes and nature of system risk. Watch it better to understand how a wobbly bridge in London helps to explain what might have brought the global financial system close to collapse in 2007-2009. System risk is a really important issue in financial markets.

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There's already been much discussion over what fueled the Great Recession of 2008. In this video, Tyler Cowen focuses on a central theme of the crisis: the failure of financial intermediaries. By 2008, the economy was in a very fragile state, with both homeowners and banks taking on greater leverage, many ending up "underwater."

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This study note looks at the regulatory system for finance in the UK in the aftermath of the Global Financial Crisis.
Financial Policy Committee of the Bank of England

FPC's main role is to identify, monitor, and take action to remove or reduce risks that threaten the resilience of the UK financial system as a whole

FPC publishes a Financial Stability Report identifying key threats to the stability of the UK financial system

The FPC has the power to instruct commercial banks to change their capital buffers

When the FPC decide that the risks to the financial system are growing, they may tell the commercial banks and other lenders to increase their capital buffers to help absorb unexpected losses on their assets (bad debts etc.)

These capital buffers are part of "macro-prudential policy" - prudent means being careful at times of uncertainty.

UK Prudential Regulation Authority (PRA)
The PRA is part of the Bank of England and is responsible for the prudential regulation and supervision of around 1,700 banks, building societies, credit unions, insurers and major investment firms

It has a particular focus on the solvency of specific financial markets such as:

Insurance providers

Buy-to-let mortgage lenders

Credit unions

Other specialist lenders

Financial Conduct Authority (FCA)
The Financial Conduct Authority (FCA) replaced the Financial Services Authority (FSA) on 1 April 2013.

It is funded entirely by the firms it regulates

The FCA has three main objectives:

Secure an appropriate degree of protection for consumers

Protect and enhance the integrity of the UK financial system

Promote effective competition in the interests of consumers

Micro and Macro Prudential Policies
Since the global financial crisis, regulators in the UK and a number of other countries have placed increased emphasis on prudential regulation - i.e. putting in place safeguards for the stability of the financial system

1. Micro-prudential involves regulation of individual financial firms such as commercial banks, payday lenders and insurance companies

2. Macro-prudential regulation is designed to safeguard the financial system as a whole - macro-prudential policy includes counter-cyclical capital buffers

The dog and the boomerang: is there a case for regulatory complexity? https://t.co/PGgnMsV8Vb pic.twitter.com/UUiYOGaFns
- Bank of England (@bankofengland) July 27, 2017
Liquidity Ratios and Capital Ratios
Liquidity means the ease and cost with which assets can be turned into cash and used immediately as a means of exchange

Certain assets are highly liquid

Notes and coins that are legal tender are perfectly liquid

Money held in sight-deposit accounts is highly liquid because it can often be withdrawn immediately without penalty (although there might be a daily limit)

Other liquid assets might include treasury bills (short term government loans) and also stocks held in large listed companies (because these stocks are traded heavily each day)

According to the Bank of England (July 2016) UK commercial banks hold more than £600 billion of high-quality liquid assets, which is around four times the level they held before the global financial crisis.
What are Liquidity Ratios?

A liquidity ratio is the ratio of liquid assets held by a bank on their balance sheet to their overall assets

Banks need to hold enough to cover expected demands from depositors

In the wake of the Global Financial Crisis (GFC) the Basel Agreement require commercial banks to keep enough liquid assets, such as cash and government bonds, to get through a 30-day market crisis

A liquidity ratio may refer to a reserve assets ratio for a bank which sets the minimum liquid reserves that a bank must maintain in the event of a sudden increase in withdrawals

A high liquidity ratio may limit the amount of lending that a bank is able to do - it must maintain higher amounts of cash

What are Capital Ratios?

Capital ratios have become important as part of attempts to maintain financial market stability in recent years

A commercial bank's capital ratio measures the funds it has in reserve against the riskier assets it holds that could be vulnerable in the event of a crisis.

The European Union runs regular "stress tests" to check whether banks have enough of a capital buffer to weather difficult economic/financial conditions (known as disaster scenarios)

Banks must maintain sufficient capital which includes money raised from selling new shares to investors and also their retained earnings (profits)

Europe's banks have raised €180bn since the end of 2013

But the size of "non-performing loans" has also risen

Core tier one ratio of Barclays Group from 2011 to 2015
The Tier 1 common capital ratio is a measurement of a commercial bank's equity capital compared with its total assets. This ratio is used to assess bank's financial strength.

Find more statistics at Statista
What are Leverage Ratios?

The leverage ratio is a simple indicator of the ability of a bank or building society to absorb losses

Leverage ratio = Capital / Exposures

The leverage ratio refers to the share of the total value of a firm's assets and its other commitments (referred to as 'exposures') that is funded with high-quality capital capable of absorbing losses while a firm is a 'going concern'.

The lower the leverage ratio, the more than a commercial bank or building society relies on debt to fund their activities

In June 2015, the FPC directed the Prudential Regulation Authority (PRA) to require each major UK commercial bank and building society to meet a leverage ratio requirement and hold buffers over that requirement

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Regulating the Financial System Post Crisis (Financial Economics) | tutor2u Economics

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This study note looks at the regulatory system for finance in the UK in the aftermath of the Global Financial Crisis.

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Financial Instability and the Real Economy (Financial Economics) | tutor2u Economics

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Why does financial instability matter for the economy? According to the Bank of England, "Financial stability - public trust and confidence in financial institutions, markets, infrastructure, and the system as a whole - is critical to a healthy, well-functioning economy."

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Financial Instability Hypothesis

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Minsky's Financial Instability Hypothesis (Financial Economics) | tutor2u Economics

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Policy Response to Global Financial Crisis

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Policy Response to Global Financial Crisis

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Evaluation

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1. Large conventional/unconventional monetary easing involving deep cuts in policy interest rates and quantitative easing

2. Massive fiscal stimulus for a while - especially in China and (to a lesser extent) in the USA

3. Backstop and bailout of the private sector (financial system, households, corporations) - including (in the UK) bail-outs and nationalisation of some banks

Side-Effects of the Macro Policy Response Post 2008
Ultra-low interest rates and quantitative easing:

1. Surge in demand for assets - rising house prices (again)

2. Increase in demand for commodities

3. Limited reductions in private sector debt

4. Continued survival of zombie businesses

5. Issues about how and when to exit from QE and near-zero interest rates - dependency on low interest rates?

Big rise in fiscal deficits and national debt

1. How and how fast to reduce fiscal deficits and debts that may be unsustainable?

2. How to deal with the moral hazard that bailouts of the financial system may have induced?

3. Decisions on when/whether to reverse nationalisation

Keynesian v Austrian Perspectives on Policy Response Keynesian approach

Provide a strong monetary & fiscal stimulus - public sector spending needed when private sector demand is weak

Focus in particular on labour-intensive infrastructure projects with a potentially high fiscal multiplier effect

Bailout the private sector to prevent catastrophic job losses

Key is to support animal spirits and prevent a collapse in demand

Austrian approach

Avoid bail-outs as they lead to moral hazard and the survival of zombie businesses which ultimately constrains long run growth

Fast-forward structural economic / market reforms to promote competition and raise productivity

Against counter-cyclical macro stimulus - especially ultra-low interest rates as this "distorts" the allocation of capital

Strategies for Avoiding Future Financial Crises

1. Floating exchange rates rather than fixed ones that could collapse

2. Build up foreign currency reserves to avoid liquidity runs on banks

3. Better regulated banks and financial systems

4. Take steps to reduce public and private sector debt to reduce solvency risks

5. Structural reforms to improve competitiveness of real economy

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Policy Responses to the Global Financial Crisis (Financial Economics) | tutor2u Economics

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The credit crunch and the collapse of Lehman led to a steep fall in global real output and an even bigger decline in the volume of world trade. There were well-founded fears that the world economy was at risk of another depression similar to the 1930s.

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As part of the revamped system of financial regulation introduced since the 2008 global financial crisis, the Bank of England subjects Britain's leading commercial banks to regular stress tests.

These tests are designed to see if the banks have sufficient capital and liquidity to be able to absorb losses from so-called tail risk events, i.e. Black swan shocks that affect both the domestic and the international economy.

The latest stress test has a nightmare scenario for the banks to contend with. It modelled how the commercial banking system would cope in a situation in which UK real GDP shrinks by 4.3% amid a worldwide recession (global output declining 2%), unemployment rising 4.5 percentage points, the world oil price halving and average UK house prices dropping by 31%.

The harshness of the test was added to by including an estimated provision of several £ billion to cover losses from mis-selling of financial products.

The latest results have just been published in the Bank's November 2016 Financial Stability Report and three lenders need to improve the amount of capital on their balance sheets after failing the tests. Part state-owned Royal Bank of Scotland must improve their balance sheet by £2bn and Barclays and Standard Chartered - are required to submit revised capital raising plans.

Extra capital can be raised in several ways including selling off poorly-performing parts of a business (a process known as divestment or de-merger). RBS may eventually have to go to the capital markets and raise fresh equity from the issue of new shares. Share prices in RBS fell quite sharply today on news that the Bank had not passed the stress test hurdles.

RBS Tumbles After Failing BoE's "Toughest Ever Stress Test" https://t.co/5dSs0QTQKL
- zerohedge (@zerohedge) November 30, 2016

RBS fails Bank of England stress test, forcing it to devise new plans in case of a financial crisis https://t.co/9ZFsD48SpN
- BBC Breaking News (@BBCBreaking) November 30, 2016

We've just published our latest #FinancialStabilityReport and the results of our annual bank stress testing. https://t.co/xrgkXDPtjk pic.twitter.com/pqJfjwzu41
- Bank of England (@bankofengland) November 30, 2016

HSBC, Lloyds Banking Group, Nationwide and Santander UK all passed the stress test and, despite elevated risks following the Brexit vote, the Governor of the Bank of England, Mark Carney declared himself moderately confident that there is a sufficient fire-break in the system should another major financial shock hit the British economy.

This short video from the Bank of England explains what stress testing is and why it is considered important as part of financial oversight / regulation.

Today we published the results of our latest bank stress-testing exercise. But what exactly is stress testing? #stresstest pic.twitter.com/31cBK8JbOb
- Bank of England (@bankofengland) November 30, 2016

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Banking Stress Tests: RBS remains the weakest link | tutor2u Economics

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As part of the revamped system of financial regulation introduced since the 2008 global financial crisis, the Bank of England subjects Britain's leading commercial banks to regular stress tests. These tests are designed to see if the banks have sufficient capital and liquidity to be able to absorb losses from so-called tail risk events, i.e.

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2016 has been a year of political shocks which themselves can be seen as part of the sustained fall-out from the global financial crisis.

On China - The Chinese government can keep the system going as long as they can continue to print money and pay debt. The underlying growth dynamic for China is slowing.

On the Euro Zone - Terminally tepid growth would be a good outcome. There is a lot of economic and political risk especially with the fragility of the Italian economy and the French Presidential election. It is the politics that creates the economic risks.

On inflation - Unlikely to return in a serious way because there is still plenty of slack in the world economy and China will continue to slow. Countries with weaker currencies will see some extra inflationary pressure.

On the US economy - Can the US economy grow at more than 3%? Wolf argues that it is completely unrealistic that a 3-4% growth rate can be regarded as a sustainable trend growth rate for the US. It would take a huge surge in productivity and unemployment is already quite low.

On the stronger US dollar - This is a major problem for countries with large external debts and weak currencies. Expect to see a surge in bankruptcies in these countries as companies in particular find it hard to repay US dollar-denominated debt. China, Japan and the Euro Zone will tend to benefit from a period of US dollar strength.

On India - India should be able to grow around 7%. The de-monetisation of the currency looks like a mess but shouldn't do serious damage to their economy. India should be the fastest-growing big economy in the world in 2017.

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Martin Wolf on Global Economy in 2017 | tutor2u Economics

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2016 has been a year of political shocks which themselves can be seen as part of the sustained fall-out from the global financial crisis. On China - The Chinese government can keep the system going as long as they can continue to print money and pay debt.

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Martin Wolf on global economy in 2017 | Opinion

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FT editor Lionel Barber speaks to Martin Wolf about the major events of 2016, Trumponomics and the biggest risks and bright spots in the global economy in the year ahead.

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Nobel Laureates: 00:03 - Joseph E. Stiglitz 00:35 - Paul R. Krugman 01:10 - Robert F. Engle More: ubs.com/nobel UBS on Facebook: http://facebook.com/ubsglobal UBS Nobel Perspectives - Exploring the questions that shape our world. Do we really understand the most important forces driving the global economy?

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The man responsible for financial stability at the Bank of England has warned against relaxing banking regulation, saying that such a move could damage the global economy.

Sir Jon Cunliffe told the BBC that "lax controls" risked undoing progress that had been made since the financial crisis.

"We've made very substantial progress since the financial crisis, increasing the resilience of the financial sector and increasing its ability to support the economy in times of stress both nationally and in Europe and globally, including the US," Sir Jon told me.

"Those changes were necessary.

"None of us want to see again the sorts of events we saw between 2007 and 2009 and the costs of those events are still very clear.

"In order to have a resilient financial sector and consistent regulation internationally we need international standards, we need the reforms we have had and it is important we preserve them."

Sir Jon's comments come after suggestions that if Britain did not secure a good trade deal with the European Union following Brexit, the UK could become an offshore tax haven - encouraging businesses and banks to move to the country to avoid tougher regulations elsewhere.

Donald Trump, via an executive order, has also announced there will be a review of the Dodd-Frank legislation in America.

It was passed during the Obama presidency to control the use of complicated financial instruments by institutions, increase the amount of money banks are required to have available to avoid tax-payer funded bailouts and stop banks using their own money to invest in intricate equity and debt products for profit, what is called proprietary trading.

Although it had many supporters for making banks more secure, it has also been attacked for making banks less able to lend and more risk averse, particularly smaller, regional banks which support local economies.

Sir Jon, who is the deputy governor of the Bank responsible for financial stability, said that it was too early to say what the outcome of the reform proposals would be.

'Regulatory conflict'

He pointed out the executive order spoke about proportionate regulation and maintained the need to prevent bail outs which didn't seem "out of line" with global approaches to regulation.

Sir Jon said it was necessary, as the Bank had done, to investigate problems of "regulatory conflict" and change the rules where there had been unintended consequences.

But he warned that as the UK had a very large financial services sector - providing about 8% of the country's economic output - it was important that the highest standards were maintained.

"It is important we have proportionate, highest quality regulation - robust and in line with best international standards," he said.

"The UK - in order to be a successful financial centre, you need good regulation, you need robust regulation and you need regulators that have credibility and experience.

"One doesn't become successful as an international centre by having lax standards and by being open to crises and regulatory arbitrage [the use of regulatory loopholes to avoid banking costs]."

'Downside risks'

Sir Jon, a member of the Monetary Policy Committee which sets interest rates, said that the next move on interest rates, whether up or down, was "balanced".

Yesterday another MPC member, Kristin Forbes, suggested that she was moving towards supporting a rate rise because growth was more robust than originally thought and inflation was rising.

"There are risks on the downside as well," Sir Jon said.

"That [the economy] will slow faster and that uncertainty effects will come in and have an impact. For me the risks are evenly balanced."

Sir Jon was speaking at the launch of new Bank research which showed that a third of companies surveyed admitted that they had not invested enough over the last five years.

He said that investment was important to support economic growth and better productivity.

Reasons for not investing included economic uncertainty, risk aversion following the financial crisis and a perception that there were still constraints on bank lending. The man responsible for financial stability at the Bank of England has warned against relaxing banking regulation, saying that such a move could damage the global economy.

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The man responsible for financial stability at the Bank of England has warned against relaxing banking regulation, saying that such a move could damage the global economy. Sir Jon Cunliffe told the BBC that "lax controls" risked undoing progress that had been made since the financial crisis.

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Bank warns of market failure from a return to lax financial rules | tutor2u Economics

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We've just flicked the switch on moving all our digital resources to instant digital download - via our new subject stores. For every subject you can now access each digital resource as soon as it is ordered. This will always be the latest edition of each resource too (and we'll update you automatically if there is an upgraded version to use).

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Selena Gomez - The Big Short (2015) Cameo

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The sub-prime housing crisis was the main fuel that ignited the 2007/ 2008 global financial crisis.

Sub-prime lending is lending money, usually to buy a house, to people who are risky to lend to.

To compensate for this risk, commercial banks charge higher interest rates.

When house prices were rising in the 2000s, banks decided that the risk of sub-prime lending had fallen, as borrowers would be able to sell their houses for a higher price than they had bought them at in order to repay their mortgage if they ran into financial difficulties.

In the USA, many sub-prime loans were insured by the firms Fannie-Mae and Freddie-Mac.

However, when house prices started to fall, sub-prime homeowners found themselves in negative equity and unable to repay their loans.

This meant that commercial banks lost out

Mortgage delinquency rates for subprime conventional loans in the United States from 2000 to 2014

This crisis spread quickly, because banks had sold on debt in the form of financial derivatives.

Effectively, they had 'chopped up' the safe loans and the sub-prime loans and 'repackaged' them in a bundle, selling them for a higher price than they would have received for merely selling on the sub-prime loans.

Financial institutions (such as pension funds) buying these derivatives didn't understand the risk attached to them, because the derivatives had been given high ratings by the major credit ratings agencies

This meant that many financial institutions owned large amounts of sub-prime debt.

The USA government ended up bailing out Fannie-Mae and Freddie Mac, and the UK government bailed out a number of UK banks taking some into state ownership.

S&P/Case Shiller U.S. National Home Price Index from 2000 to 2015

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Sub-Prime Housing Crisis (Financial Economics) | tutor2u Economics

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The sub-prime housing crisis was the main fuel that ignited the 2007/ 2008 global financial crisis. Sub-prime lending is lending money, usually to buy a house, to people who are risky to lend to. To compensate for this risk, commercial banks charge higher interest rates.

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Moral hazard exists in a market where an individual or organisation takes many more risks than they should do because they know that they are either covered by insurance, or that the government will protect them from any damage incurred as a result of those risks.
Asymmetric information
This type of market failure exists when one individual or party has much more information than another individual or party, and uses that advantage to exploit the other party.

Finance is a market in information - often a potential borrower (such as a small business) has better information on the likelihood that they will be able to repay a loan than the lender.
Monopoly / Market-Rigging
This type of market failure is effectively collusion or abuse of a the power resulting from a concentrated market.

When there is a small number of firms in a market, they may choose to work together to increase their joint profits and exploit consumers.

The Competition and Markets Authority report on UK banking in August 2016 said that "the older and larger banks, which still account for the large majority of the retail banking market, do not have to work hard enough to win and retain customers and it is difficult for new and smaller providers to attract customers."
Speculative Bubbles
A bubble exists when the price of something is driven well above what it should be, usually due to the behaviour of consumers.

Externalities
A negative externality exists when a market transaction has a negative consequence for a 3rd party.

A positive externality exists when a market transaction has a positive consequence for a 3rd party.

We can also talk about network externalities, whereby there are knock-on effects of organisations working together - you could describe this as synergy if the effects are positive, or discord if the effects are negative.
Principal-Agent Problem
This situation exists when one person (i.e. the agent) is able to make decisions on behalf of another person (i.e. the principal), but the principal is unable to adequately supervise the agent. This can result in the agent acting in his/her own best interests rather than the interests of the principal.

Excessive speculation
This can be defined as a risky action in which a person or organisation tries to predict what will happen to the price of an asset and buys / sells accordingly in order to try and make a profit. A speculator takes advantage of fluctuations in market prices.
Incomplete markets
An incomplete market exists when the available level of supply is not enough to meet the needs and wants of consumers i.e. only a proportion of potential demand is met.

Around 2 billion adults worldwide without a bank account.

10 million US households, and 1.5 million UK adults are also unbanked

Moral Hazard and Banking Instability

Moral hazard happens when an agent is given an implicit guarantee of support in the event of making a loss - for example insurance pay-outs or the guarantee of a bail-out

In the commercial banking industry, the belief that the government will absorb the losses that bank creditors would otherwise bear can lead to moral hazard.

This may lead banks to take on more risk than is optimal, since they believe they receive any private benefits from the risk taking (i.e. higher profits) while the government will bear the cost of failure (funded eventually by the tax payer)

Some institutions may be deemed "too big to fail" - leading to diseconomies of scale and increasing the risk of financial collapse

Guaranteeing the deposits of savers might also mean that banks can attract deposits by offering lower rates of interest

The Global Banking Crisis and aspects of Market and Regulatory Failure

Irrational exuberance
Bank and investors over-optimistic, herd behaviour

Failure to understand tail-end risks (or "Black Swan events")

Principal agent problem
Senior bank executives did not understand complex financial instruments such as CDOs

Executives unaware of the scale of leveraged, risky trading

Moral hazard
Deposit insurance, provision of central bank liquidity, and bail-outs made it rational for banks to take on excessive risk

Asymmetry of risk: Gains to private investors, losses absorbed by the public sector

Labour market discrimination
Would having more women as traders / executives helped to avoid the financial crisis?

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Financial Market Failure (Financial Economics) | tutor2u Economics

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Moral hazard exists in a market where an individual or organisation takes many more risks than they should do because they know that they are either covered by insurance, or that the government will protect them from any damage incurred as a result of those risks.

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Death of Manufacturing & the Global Deflation

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The Mini Lecture "Global Financial Crisis" addresses causes and possible solutions of the global financial crisis that hit the world in 2007 with lecture snippets of Robert Mundell and Joseph Stiglitz from the Lindau Meetings on Economic Sciences.