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Change Overview and Rationale

From July 2007 to March 2009, share prices for global banks fell by 75%. That erased US$5 trillion in shareholder equity. Considering all markets, McKinsey has estimated that the fall in global wealth was US$25 trillion. To put that in context, the lost wealth was nearly 45% of global GDP, or a half year’s wages for the entire working world. On that basis, says Bank of England’s Andrew Haldane, “asset price falls in the UK and US were as large as during the Great Depression.”

Regulators during the crisis were most concerned about the nearly unmanageable spike in systemic risk which, according to the IMF, FSB and BIS, is defined as “a risk of disruption to financial services that is caused by an impairment of all or parts of the financial system and has the potential to have serious negative consequences for the real economy.”

Prior to the Crisis, it was thought that diversification of counterparty networks would work to reduce systemic risk in the financial system.

The Bank of England has called the Credit Crisis an “extraordinary period” which will have “deep and long-lasting consequences” for the global capital markets. The United States Federal Reserve has said the “the sources of the crisis were extraordinarily complex and numerous,” but at the root was the Fed’s belief that banks’ “risk management systems were inadequate and their capital and equity buffers insufficient.”