## 1. Interbank Lending Growth Rates in the Euro Area, Switzerland, the United Kingdom, and the United States

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---

### Introduction — scope and high-level findings
- The 2008–09 financial crisis was "deeper and wider than previous post-war crises."
- Analysis focuses on institutions and markets in Germany, Switzerland, the United Kingdom, and the United States.
- The paper reviews policy impacts through the first months of 2009 from three perspectives: effects on financial institutions, effects on financial markets, and effects on stakeholders.
- Central bank intervention "had successfully addressed pressures on bank liquidity," but the underlying financial position of large complex financial institutions (LCFIs) "remained precarious."
- Key observed weaknesses among LCFIs:
  - Profitability and earnings deteriorated; market analysts expected no major improvements over 2009–10 as of end-March 2009.
  - Tier 1 ratios were boosted via capital injections, yet tangible common equity (TCE) "remained at a critical level for most institutions."
  - Asset quality was weakening; credit spreads for LCFIs remained wide.
  - Market-driven deleveraging continued; lending surveys pointed to credit tightening in the United States, Europe, Switzerland, and the United Kingdom.
  - Public guarantees supported bank debt issuance but created a sharp differentiation between guaranteed senior and subordinated debt.
  - Bank share prices "declined sharply, largely wiping out shareholders’ capital."

### Financial institutions — effects of policy measures on bank soundness
- Government support measures intended effects:
  - Improve bank liquidity, profitability, capital adequacy, and asset quality.
  - Contain creditor runs and support restructuring, loss recognition, and asset management.
- Central bank actions:
  - "Interventions started to occur relatively early" and aimed to restore financial stability and mitigate spillovers to the real economy.
  - Extended liquidity beyond traditional channels: lengthened loan terms, expanded eligible collateral, reduced borrowing costs, and enlarged eligible counterparties.
  - Central bank balance sheets "expanded sharply after September 2008, mainly as a result of credit to banking institutions."
- Liquidity and balance-sheet composition:
  - Liquidity at selected LCFIs improved since October 2008 as measured by "cash and interbank assets over total assets."
  - Marketable securities as a percentage of total assets "oscillated, largely reflecting asset sales and write downs."
  - Larger holdings of liquid assets may reflect intentional hoarding of cash.
- Profitability and earnings:
  - Returns on assets (ROA) and returns on equity (ROE) "plummeted since end-2007"; by end-2008 the majority of selected institutions had "insignificant or negative ROA or ROE."
  - ROA and ROE stabilized briefly after March–April 2008 interventions but deteriorated again after Lehman Brothers' failure in September 2008.
  - Market forecasts of future earnings "have declined significantly over the last year" for major German, Swiss, U.K., and U.S. LCFIs.
- Capital adequacy and leverage:
  - Tier 1 ratios "have been boosted through massive capital injections, mostly in the form of preferred shares."
  - Capital injections and guarantees allowed Tier 1 ratios "to be brought back to well above regulatory standards."
  - Despite this, TCE and core leverage ratios "remained at critical levels for most institutions."
  - Market focus increased on TCE (which strips out "goodwill," deferred tax assets, preferred stocks, and other intangible forms of capital).
- Asset quality and provisioning:
  - Nonperforming assets "have increased since end-2007" for most selected banks.
  - Provisions for most selected banks "have not fully matched nonperforming loans."
  - High CDS rates for large investment-grade corporates indicate "a deterioration in the credit quality in the coming months."
- Default risk indicators:
  - Probabilities of default implied by CDS spreads spiked in September 2008 and subsequently indicated a reduction in one-year default expectations, but U.S.-based LCFIs displayed a "higher level and a wider range of probabilities" than European counterparts.
  - Possible explanations include perceived implicit government guarantees for European banks and greater vulnerability of U.S. banks due to larger holdings of marketable securities to total assets.

### Financial markets — repo, interbank, and commercial paper markets

A. Repo markets and interbank lending
- Market disruptions and policy responses:
  - Lehman Brothers' bankruptcy in September 2008 increased counterparty risk and produced a large contraction of repo operations among Swiss, U.K., and U.S. banks.
  - Central banks expanded the pool of collateral used in repo and reverse repo operations to boost liquidity.
  - Government guarantees lowered short-term funding costs.
- Interbank rates:
  - After spiking in September 2008, "three-month Libor rates narrowed thereafter" in response to support programs.
  - Narrowing reflected a reduction in misalignment between Overnight Indexed Swap (OIS) rates and Interbank Offering rates published by the British Bankers’ Association.
  - Swap spreads "have fallen to precrisis levels."
- Repo versus Fed funds dynamics:
  - Although repo and Fed funds rates declined since August 2007, their differential "has pointed to continuing concerns over credit risk on several occasions."
  - During turbulence, repo rates have traded higher than Fed funds rates on several occasions, indicating "a premium on high-value collateral over borrowers or collateral."

B. Commercial paper
- Market deterioration and effects:
  - Disruption in the commercial paper market added pressure on the banking system; as commercial paper liquidity dried up, corporates drew on backup lines and loan commitments.
  - Fears of constrained access to lines of credit led to a "run on banks’ lines of credit."
  - The stock of unused back-up commitments at banks "has declined since end-2007," contributing to an expansion in total assets and loans amid deleveraging.
- Federal Reserve intervention:
  - The Fed’s Commercial Paper Funding Facility (CPFF) "has helped mitigate liquidity pressures on the U.S. commercial paper market."
  - As of end-December 2008, the Fed had purchased "about 20 percent of the outstanding commercial paper."
  - Only highly rated commercial paper (A-1/P-1/F1) could be pledged as collateral to the CPFF.
  - The spread between rates on high- and low-quality commercial paper "widened sharply after September 2008 but has narrowed since the beginning of 2009."
  - Result: highly rated issuers have access to central bank facilities, while lower-rated issuers "have remained credit-constrained."

### Money market and commercial paper markets (additional details)
- The Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility:
  - Funded the purchase of asset-backed commercial paper by banks from money market mutual funds.
  - Was equivalent to about 38 percent of outstanding asset-backed commercial paper at end-September 2008.
  - Has since lost its importance (see text reference to Figure 12).
- U.S. commercial paper activity:
  - Monthly average and outstanding issuance became volatile through 2008–2009 (see figures referenced).
  - U.S. asset-backed commercial paper outstanding by type and monthly issuance series showed sharp declines around late 2008.
- European commercial paper:
  - European asset-backed commercial paper issuance plummeted in 2008, declining by 37 percent during the year.
  - Much issuance reportedly retained by sponsoring bank conduits for repo purposes with the European Central Bank and Bank of England.
  - European commercial paper rates in U.S. dollars, British pounds, and Euros have fallen substantially since September 2008.

### Structured credit and securitization markets
- U.S. securitization market:
  - Came to a virtual halt in 2008 (except for agency mortgage-backed securities).
  - Banks and other financial institutions securitized about US$1,280 billion of residential and commercial mortgages and other assets in 2007.
  - In 2008, only US$178 billion of residential and commercial mortgage-backed and other asset-backed securities was issued.
  - Agency mortgage-backed securities have an implicit guarantee by the U.S. Treasury and can be pledged as collateral for Fed facilities.
  - The Fed designed the Term Asset-Backed Securities Loan Facility (TALF) to encourage origination of AAA asset-backed securities.
  - Despite continued issuance of agency mortgage-backed securities, issuance has not been sufficient to restore precrisis levels of mortgage and other loans.
- European securitization:
  - European securitization markets are smaller than U.S. counterparts.
  - Special central bank repo transactions appear to have supported European residential mortgage-backed security (RMBS) issuance since 2008:Q2.

### Stakeholders: deposits, lending, and market confidence
- Deposits and deposit insurance:
  - Expansion of deposit insurance by many governments assured depositors up to certain limits and helped avoid bank runs and a contraction in deposits.
  - Governments transferred deposit accounts from failing banks to other institutions, helping unsecured creditors avoid losses on average.
  - This prevented a drastic contraction in banking system deposits in Europe, Switzerland, the United Kingdom, and the United States.
- Lending and credit growth:
  - Net credit to the private sector contracted in the United States during 2008:Q4.
  - Net credit still increased in the United Kingdom and Europe during 2008:Q4.
  - In Switzerland, domestic credit trended upwards, but net credit fell between 2008:Q3 and 2008:Q4, and on a year over year basis during 2009:Q1.
  - The stock of unused back-up commitments at U.S. banks declined since end-2007, resulting in an expansion in total assets and loans.
  - Lending surveys pointed to a continued deterioration for the next year in the United States, the United Kingdom, and Europe.
- Public guarantees and debt issuance:
  - Guaranteed senior bond issuance by U.S. and U.K. banks amounted to 55 percent and 50 percent of bank bond issuance, respectively, since 2008:Q4.
  - Government guarantees created a sharp differentiation between senior and subordinated debt issuance; the spread between the two widened significantly after September 2008 as only senior bonds were guaranteed.
  - Market preference for guaranteed senior debt has been detrimental to subordinated debt issuance.
- Bank valuations and capital:
  - Bank share prices declined sharply; price-to-book value ratios for some institutions reached very low levels consistent with failing banking institutions, making it difficult for banks to attract private capital.
  - Governments responded with recapitalization programs:
    - The U.S. government provided capital via TARP preferred shares and warrants.
    - European governments used a more diverse set of instruments.
    - Both U.S. and European banks raised capital from governments, private investors, and sovereign wealth funds.
    - Most capital for European banks was raised as stock offers, perpetual bonds, and preferred shares.

### System-wide assessment through end-March 2009 and near-term outlook
- Effects of support measures through end-March 2009:
  - Support measures addressed immediate confidence issues in the banking system.
  - Liquidity and regulatory capital ratios were boosted significantly.
  - Profitability and earnings outlook of LCFIs deteriorated; their tangible common equity (TCE) remained at a critical level, and asset quality weakened.
  - Market confidence remained weak; bank stock prices collapsed despite senior debt guarantees.
  - Credit markets remained highly dependent on official support; highly rated issuers had access to central bank facilities, while lower-rated issuers were credit-constrained.
  - Structured credit product markets remained largely frozen except for agency-guaranteed issues.
- Post end-March measures and outlook:
  - Business environment for some banks improved after government measures at end-March (including G-20 meetings).
  - Earnings in many U.S. banks were higher than expected in 2009:Q1 and 2009:Q2; many banks passed the stress test.
  - One-year forward consensus earnings per share reversed downward trends for Swiss and U.S. banks.
  - The economic forecast for the remainder of 2009 and 2010 remained gloomy; a deterioration in the economic environment could impair the fragile recovery by banks.

*Source: _spn0924 - 1. Interbank Lending Growth Rates in the Euro Area, Switzerland, the United Kingdom, and the United States (IMF chapter content provided).*

### 1. Interbank Lending Growth Rates in the Euro Area, Switzerland, the United Kingdom,

### 1. Interbank Lending Growth Rates in the Euro Area, Switzerland, the United Kingdom, and the United States

### Introduction — scope and high-level findings
- The 2008–09 financial crisis was "deeper and wider than previous post-war crises."
- Analysis focuses on institutions and markets in Germany, Switzerland, the United Kingdom, and the United States.
- The paper reviews policy impacts through the first months of 2009 from three perspectives: effects on financial institutions, effects on financial markets, and effects on stakeholders.
- Central bank intervention "had successfully addressed pressures on bank liquidity," but the underlying financial position of large complex financial institutions (LCFIs) "remained precarious."
- Key observed weaknesses among LCFIs:
  - Profitability and earnings deteriorated; market analysts expected no major improvements over 2009–10 as of end-March 2009.
  - Tier 1 ratios were boosted via capital injections, yet tangible common equity (TCE) "remained at a critical level for most institutions."
  - Asset quality was weakening; credit spreads for LCFIs remained wide.
  - Market-driven deleveraging continued; lending surveys pointed to credit tightening in the United States, Europe, Switzerland, and the United Kingdom.
  - Public guarantees supported bank debt issuance but created a sharp differentiation between guaranteed senior and subordinated debt.
  - Bank share prices "declined sharply, largely wiping out shareholders’ capital."

### Financial institutions — effects of policy measures on bank soundness
- Government support measures intended effects:
  - Improve bank liquidity, profitability, capital adequacy, and asset quality.
  - Contain creditor runs and support restructuring, loss recognition, and asset management.
- Central bank actions:
  - "Interventions started to occur relatively early" and aimed to restore financial stability and mitigate spillovers to the real economy.
  - Extended liquidity beyond traditional channels: lengthened loan terms, expanded eligible collateral, reduced borrowing costs, and enlarged eligible counterparties.
  - Central bank balance sheets "expanded sharply after September 2008, mainly as a result of credit to banking institutions."
- Liquidity and balance-sheet composition:
  - Liquidity at selected LCFIs improved since October 2008 as measured by "cash and interbank assets over total assets."
  - Marketable securities as a percentage of total assets "oscillated, largely reflecting asset sales and write downs."
  - Larger holdings of liquid assets may reflect intentional hoarding of cash.
- Profitability and earnings:
  - Returns on assets (ROA) and returns on equity (ROE) "plummeted since end-2007"; by end-2008 the majority of selected institutions had "insignificant or negative ROA or ROE."
  - ROA and ROE stabilized briefly after March–April 2008 interventions but deteriorated again after Lehman Brothers' failure in September 2008.
  - Market forecasts of future earnings "have declined significantly over the last year" for major German, Swiss, U.K., and U.S. LCFIs.
- Capital adequacy and leverage:
  - Tier 1 ratios "have been boosted through massive capital injections, mostly in the form of preferred shares."
  - Capital injections and guarantees allowed Tier 1 ratios "to be brought back to well above regulatory standards."
  - Despite this, TCE and core leverage ratios "remained at critical levels for most institutions."
  - Market focus increased on TCE (which strips out "goodwill," deferred tax assets, preferred stocks, and other intangible forms of capital).
- Asset quality and provisioning:
  - Nonperforming assets "have increased since end-2007" for most selected banks.
  - Provisions for most selected banks "have not fully matched nonperforming loans."
  - High CDS rates for large investment-grade corporates indicate "a deterioration in the credit quality in the coming months."
- Default risk indicators:
  - Probabilities of default implied by CDS spreads spiked in September 2008 and subsequently indicated a reduction in one-year default expectations, but U.S.-based LCFIs displayed a "higher level and a wider range of probabilities" than European counterparts.
  - Possible explanations include perceived implicit government guarantees for European banks and greater vulnerability of U.S. banks due to larger holdings of marketable securities to total assets.

### Financial markets — repo, interbank, and commercial paper markets

A. Repo markets and interbank lending
- Market disruptions and policy responses:
  - Lehman Brothers' bankruptcy in September 2008 increased counterparty risk and produced a large contraction of repo operations among Swiss, U.K., and U.S. banks.
  - Central banks expanded the pool of collateral used in repo and reverse repo operations to boost liquidity.
  - Government guarantees lowered short-term funding costs.
- Interbank rates:
  - After spiking in September 2008, "three-month Libor rates narrowed thereafter" in response to support programs.
  - Narrowing reflected a reduction in misalignment between Overnight Indexed Swap (OIS) rates and Interbank Offering rates published by the British Bankers’ Association.
  - Swap spreads "have fallen to precrisis levels."
- Repo versus Fed funds dynamics:
  - Although repo and Fed funds rates declined since August 2007, their differential "has pointed to continuing concerns over credit risk on several occasions."
  - During turbulence, repo rates have traded higher than Fed funds rates on several occasions, indicating "a premium on high-value collateral over borrowers or collateral."

B. Commercial paper
- Market deterioration and effects:
  - Disruption in the commercial paper market added pressure on the banking system; as commercial paper liquidity dried up, corporates drew on backup lines and loan commitments.
  - Fears of constrained access to lines of credit led to a "run on banks’ lines of credit."
  - The stock of unused back-up commitments at banks "has declined since end-2007," contributing to an expansion in total assets and loans amid deleveraging.
- Federal Reserve intervention:
  - The Fed’s Commercial Paper Funding Facility (CPFF) "has helped mitigate liquidity pressures on the U.S. commercial paper market."
  - As of end-December 2008, the Fed had purchased "about 20 percent of the outstanding commercial paper."
  - Only highly rated commercial paper (A-1/P-1/F1) could be pledged as collateral to the CPFF.
  - The spread between rates on high- and low-quality commercial paper "widened sharply after September 2008 but has narrowed since the beginning of 2009."
  - Result: highly rated issuers have access to central bank facilities, while lower-rated issuers "have remained credit-constrained."

*Source: _spn0924 - 1. Interbank Lending Growth Rates in the Euro Area, Switzerland, the United Kingdom,* and *the United States* (IMF chapter content provided).*

### 20.      The Fed also provided temporary relief to money market mutual funds through the

### _spn0924 - 20.      The Fed also provided temporary relief to money market mutual funds through the

### Money market and commercial paper markets
- The Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility:
  - Funded the purchase of asset-backed commercial paper by banks from money market mutual funds.
  - Was equivalent to about 38 percent of outstanding asset-backed commercial paper at end-September 2008.
  - Has since lost its importance (see text reference to Figure 12).
- U.S. commercial paper activity:
  - Monthly average and outstanding issuance became volatile through 2008–2009 (see figures referenced).
  - U.S. asset-backed commercial paper outstanding by type and monthly issuance series showed sharp declines around late 2008.
- European commercial paper:
  - European asset-backed commercial paper issuance plummeted in 2008, declining by 37 percent during the year.
  - Much issuance reportedly retained by sponsoring bank conduits for repo purposes with the European Central Bank and Bank of England.
  - European commercial paper rates in U.S. dollars, British pounds, and Euros have fallen substantially since September 2008.

### Structured credit and securitization markets
- U.S. securitization market:
  - Came to a virtual halt in 2008 (except for agency mortgage-backed securities).
  - Banks and other financial institutions securitized about US$1,280 billion of residential and commercial mortgages and other assets in 2007.
  - In 2008, only US$178 billion of residential and commercial mortgage-backed and other asset-backed securities was issued.
  - Agency mortgage-backed securities have an implicit guarantee by the U.S. Treasury and can be pledged as collateral for Fed facilities.
  - The Fed designed the Term Asset-Backed Securities Loan Facility (TALF) to encourage origination of AAA asset-backed securities.
  - Despite continued issuance of agency mortgage-backed securities, issuance has not been sufficient to restore precrisis levels of mortgage and other loans.
- European securitization:
  - European securitization markets are smaller than U.S. counterparts.
  - Special central bank repo transactions appear to have supported European residential mortgage-backed security (RMBS) issuance since 2008:Q2 (see Figure 15).

### Stakeholders: deposits, lending, and market confidence
- Deposits and deposit insurance:
  - Expansion of deposit insurance by many governments assured depositors up to certain limits and helped avoid bank runs and a contraction in deposits.
  - Governments transferred deposit accounts from failing banks to other institutions, helping unsecured creditors avoid losses on average.
  - This prevented a drastic contraction in banking system deposits in Europe, Switzerland, the United Kingdom, and the United States (see Table 2).
- Lending and credit growth:
  - Net credit to the private sector contracted in the United States during 2008:Q4.
  - Net credit still increased in the United Kingdom and Europe during 2008:Q4.
  - In Switzerland, domestic credit trended upwards, but net credit fell between 2008:Q3 and 2008:Q4, and on a year over year basis during 2009:Q1.
  - The stock of unused back-up commitments at U.S. banks declined since end-2007 (see Figure 10), resulting in an expansion in total assets and loans.
  - Lending surveys pointed to a continued deterioration for the next year in the United States, the United Kingdom, and Europe.
- Public guarantees and debt issuance:
  - Guaranteed senior bond issuance by U.S. and U.K. banks amounted to 55 percent and 50 percent of bank bond issuance, respectively, since 2008:Q4 (see Figure 16).
  - Government guarantees created a sharp differentiation between senior and subordinated debt issuance; the spread between the two widened significantly after September 2008 as only senior bonds were guaranteed.
  - Market preference for guaranteed senior debt has been detrimental to subordinated debt issuance.
- Bank valuations and capital:
  - Bank share prices declined sharply; price-to-book value ratios for some institutions reached very low levels consistent with failing banking institutions (see Figure 17), making it difficult for banks to attract private capital.
  - Governments responded with recapitalization programs:
    - The U.S. government provided capital via TARP preferred shares and warrants.
    - European governments used a more diverse set of instruments.
    - Both U.S. and European banks raised capital from governments, private investors, and sovereign wealth funds.
    - Most capital for European banks was raised as stock offers, perpetual bonds, and preferred shares.

### System-wide assessment through end-March 2009 and near-term outlook
- Effects of support measures through end-March 2009:
  - Support measures addressed immediate confidence issues in the banking system.
  - Liquidity and regulatory capital ratios were boosted significantly.
  - Profitability and earnings outlook of LCFIs deteriorated; their tangible common equity (TCE) remained at a critical level, and asset quality weakened.
  - Market confidence remained weak; bank stock prices collapsed despite senior debt guarantees.
  - Credit markets remained highly dependent on official support; highly rated issuers had access to central bank facilities, while lower-rated issuers were credit-constrained.
  - Structured credit product markets remained largely frozen except for agency-guaranteed issues.
- Post end-March measures and outlook:
  - Business environment for some banks improved after government measures at end-March (including G-20 meetings).
  - Earnings in many U.S. banks were higher than expected in 2009:Q1 and 2009:Q2; many banks passed the stress test.
  - One-year forward consensus earnings per share reversed downward trends for Swiss and U.S. banks (see Figure 4).
  - The economic forecast for the remainder of 2009 and 2010 remained gloomy; a deterioration in the economic environment could impair the fragile recovery by banks.

*Source: IMF staff analysis as presented in the provided chapter excerpt.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/spn/2009/_spn0924.pdf_