Overview

Chart 1 The phases of the crisis

Chart 2 US residential mortgage-backed securities (RMBS) issuance(a)

Source: UBS.

(a) Issuance is on a gross basis.

Chart 3 Global collateralised debt obligation issuance(a)

Source: JPMorgan Chase & Co.

(a) Funded CDOs refer to instruments backed by corporate bonds; unfunded CDOs refer to instruments backed by credit default swaps.

(b) Unfunded data for September not available.

Chart 4 US sub-prime mortgage delinquencies and home equity loan index spreads(a)

Sources: Lehman Brothers, Mortgage Bankers Association and Thomson Datastream.

(a) The home equity loan asset-backed security sector is an amalgam of subsectors related to different underlying mortgage products, including first lien sub-prime mortgage loans, closed-end second mortgage loans, so-called ‘high LTV (loan to value)’ mortgage loans, and home equity lines of credit. This chart shows the higher-risk tranches of securities backed by such lending.(b) US sub-prime residential mortgages 30+ days delinquency rate.

Chart 5 Range of delinquency rates on mortgages backing US sub-prime securities(a)(b)

Sources: Bloomberg and Bank calculations.

(a) 60+ days delinquent, including foreclosures.(b) Range of five RMBS (on each date) issued by (the same) major issuers.

Chart 6 Residential mortgage-backed securities spreads across selected countries(a)(b)

Source: Lehman Brothers.

(a) A-rated five-year spreads over Libor except for Spain which uses ten-year spreads over Libor.(b) All countries’ data are prime residential mortgage-backed securities except for the United States which uses home equity loans, which will

tend to be of lower quality.

Chart 7 Comovement between option-implied volatility across assets(a)

Sources: British Bankers’ Association, Chicago Mercantile Exchange, Citi, Eurex, Euronext.liffe, Royal Bank of Scotland and Bank calculations.

(a) Proportion of variation in changes in three-month option-implied volatility of UK, US and euro-area equities, interest rates and exchange rates explained by the first principal component over a six-month rolling window.

(b) April 2007 Report.

Chart 8 Financial market liquidity(a)

Sources: Bank of England, Bloomberg, Chicago Board Options Exchange, Debt Management Office, London Stock Exchange, Merrill Lynch, Thomson Datastream and Bank calculations.

(a) The liquidity index shows the number of standard deviations from the mean. It is a simple unweighted average of nine liquidity measures, normalised on the period 1999–2004. Data shown are an exponentially weighted moving average. The indicator is more reliable after 1997 as it is based on a greater number of underlying measures. Data have been revised following methodological changes. See April 2007 Report, Box 2: Financial market liquidity, page 18.

Chart 9 US$-denominated commercial paper and Fed funds rate(a)

Source: Board of Governors of the Federal Reserve.

(a) 30-day, AA commercial paper rates.bonds.

Chart 10 US$-denominated commercial paper outstanding

Source: Board of Governors of the Federal Reserve.

Chart 11 Spreads of international three-month interbank rates to three-month expected policy rates(a)

Source: Bloomberg.

(a) Three-month Libor spreads over comparable overnight index swap rates.

Overview: Box A

Chart 1 Northern Rock: balance sheet growth and liability structure — June 1998-June 2007

Source: Northern Rock Interim and Annual Reports.

Northern Rock has published IFRS based balance sheet data from 1 January 2004. In its UK GAAP balance sheet presentation prior to this, non-recourse securitised lending was deducted from assets and the notes issued by the securitisation vehicle excluded from the group’s debt liabilities. To achieve comparability with the later IFRS data these amounts have been included as securitised notes for the period 1999 H1 to 2003 H2.

Chart 2 Five-year credit default swap premia

Source: Markit Group Limited.

Chart 3 Relative equity prices(a)

Sources: Bloomberg and Thomson Datastream.

(a) Countrywide’s price is deflated by the S&P 500 index and Northern Rock’s price by FTSE All-items index.

Chart 12 Major UK banks’ credit default swap premia

Sources: Bloomberg, Markit Group Limited, published accounts and Bank calculations.

(a) Asset-weighted average five-year premia.

Table A Key lessons from recent events

Area of weakness Specific issues raised

Liquidity management •Underinsurance against closure of key funding markets.•Inadequate recognition of contingent liquidity obligations

to off balance sheet entities.•Scenarios used in the stress testing of funding

insufficiently severe.

Valuation of complex

structured products

•High dependency on models in valuation.•Extent of investors’ reliance on a narrow ratings metric.•Insufficient clarity in the composition and construction of

instruments.

Opacity of structured credit exposures •Inadequate disclosure of exposures and losses.•Lack of transparency in off balance sheet exposures.

Crisis management arrangements •Insolvency arrangements for banks.•Deposit insurance regime.•Improvements in tripartite arrangements.•Underdeveloped practical arrangements for managing

stress at an international institution.

Chart 13 Major UK banks’ wholesale funding as a percentage of total funding(a)(b)

(a) 2007 data are as at 2007 H1.(b) Wholesale funding is defined as interbank deposits plus debt securities in issue. Total funding is wholesale funding plus customer deposits.rates.

Chart 14 Major UK banks’ Tier 1 capital ratios (a)(b)

Sources: Published accounts and Bank calculations.

(a) Tier 1 capital includes ordinary shares, associated reserves and retained earnings.(b) All ratios reported on a Basel I basis.(c) 2007 H1 figure..

Table B Price changes of risky assets

Changes between: Changes

since:

31 Jan 2003

to

29 June 2007

1 July

to

31 Aug 2007

3 Sep

to

15 Oct 2007

April 2007

Report

World equity index(a) 116 -3 8 10

MSCI emerging markets equity index(a)

265 1 18 36

Investment-grade bond spreads(b)

-74 26 3 25

Sub-investment grade bond spreads(b)

-432 125 -59 71

Emerging market bond spreads(b)

-506 55 -41 2

¥/US$ exchange rate(a) 3 -5 1 -1

US asset-backed commercial paper spreads(b)

5 117 -68 51

Brent crude oil price(a) 128 1 11 18

Sources: Bloomberg, Merrill Lynch, Reuters, US Federal Reserve and Bank calculations.(a) Per cent.(b) Basis points.

Chart 15 Risk premium on three-month UK interbank lending (a)

Sources: Bloomberg and Bank calculations.

(a) Three-month sterling-Libor spread over sterling over overnight index average swap rate. Dotted lines show three-month forward spreads.

Table C Estimated capital and funding impact on major UK banks of unanticipated balance sheet expansion (a)

Extra funding (per cent)(b) Extra risk-weighted assets (£ billions)

Change in Tier 1 ratio (per cent)

Current Prospective (c)

Total 12.0 147.4 8.2 7.6

Of which:

ABCP(d) -funded vehicles 7.7 109.1 - (-0.40pp)

Leveraged buyouts 1.1 15.5 - (-0.06pp)

MBS (e) 3.2 22.8 - (-0.08pp)

Sources: Bank of England, Dealogic, Fitch Ratings Ltd and Bank calculations.

(a) Assumes a scenario under which banks cannot distribute any assets for the remainder of 2007 and are required to provide full liquidity support to all (b) off balance sheet vehicles.(b) As a percentage of major UK banks’ funding obtained from interbank deposits and debt securities in issue.(c) Assumes LBO pipeline, ABCP liquidity support lines subject to 100% risk-weighting, mortgages not securitised subject to 50% risk-weighting. Based on capital

position at end-2006.(d) Asset-backed commercial paper.(e) Assumes value of mortgage-backed security (MBS) (defined as RMBS and CMBS) that cannot be issued by major UK banks is equal to average value of MBS

issued by these institutions in 2006 Q3 and 2006 Q4.

Chart 16 Corporate credit availability (a)

Source: Bank of England Credit Conditions Survey, 2007 Q3.

(a) A positive balance indicates more credit is available.(b) Net percentage balances are calculated by weighting together the responses of those lenders who answered the question. The blue bars show the responses over the previous three months. The magenta diamonds show the expectations over the next three months. Expectations balances have been moved forward one quarter so that they can be compared with the actual outturns in the following quarter. See www.bankofengland.co.uk/publications/other/monetary/creditconditionssurvey070926.pdf for further details.

Table D Key vulnerabilities in the period ahead: change in assessment since April 2007

Source: Bank calculations.

(a) Assessed change in the probability of a vulnerability being triggered over the next three years.(b) Assessed change in the expected impact on major UK banks’ balance sheets if a vulnerability is triggered over the next three years.

Chart 17 LCFIs and major UK banks’ credit default swap premia

Sources: Bloomberg, Markit Group Limited, published accounts and Bank calculations.

(a) Asset-weighted average five-year premia.