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Crisis of confidence

When banks lend money to each other without guarantees, they demand a risk premium. These have risen constantly since the autumn of 2007, pointing to the crisis of confidence on financial markets. A timeline on the course of the financial crisis.

The chronology of the crisis

9 - 10 August 2007:
The European Central Bank (ECB) suddenly pumps 95 billion euros into the interbank market, the market on which banks lend money to each other. This move marks the beginning of the financial crisis. Beforehand banks were relatively willing to lend each other money, even without guarantees from the borrowers. Since August 2007, banks have been very cautious in lending to other banks. This is also reflected in the difference in interest rates for non-guaranteed and guaranteed loans. Before the crisis this gap was below 0.1 percentage points. Between mid August 2007 and the insolvency on 15 September 2008 of Lehman Brothers, the fourth-largest investment bank in the US, it lay at 0.7 percent. Since the Lehman Brothers bankruptcy it has risen again.

13 - 17 September 2007:
The English bank Northern Rock must be rescued by the British government. The bank had refinanced the loans it had granted primarily on the capital market, that is it had sold securities to other banks and institutional investors. As this market dries up and customers demand their money, things come to a bank run. Fears are high that there will be no more money left because other customers have already withdrawn their savings. Long queues form outside branches until the state steps in with sufficient guarantees.

21 January 2008:
At first the crisis remains relatively comprehensible and the stock markets relatively unaffected. Increasingly investors see that the crisis on financial markets will be accompanied by problems across the economy. The American economy depends on consumption-oriented households, a robust labour market and high real estate prices. As the real estate prices drop and the financially stricken banks are more cautious in allocating loans, the hope that the crisis will remain within the banking sector proves deceptive. Share prices plummet. America is "lucky" on this day. The stock markets are closed due to a public holiday. The Federal Reserve lowers the prime rate on 22 January 2008. The crisis of the financial market increasingly spreads to the economy as a whole.

14 - 17 March 2008:
Bear Stearns – a large US investment bank – finds no more creditors. Ultimately there is no other solution than an emergency sale to one of the largest banks in the US, JP Morgan. The deal goes through only because the Federal Reserve backs it with a guarantee. This bank is saved.

15 September 2008:
A black Monday. As opposed to with Bear Stearns, the state refuses to intervene in favour of Lehman Brothers investment bank. When the search for a buyer fails the bank must declare bankruptcy. The financial markets are shocked that the crisis could topple such an address.

29 September 2008:
German mortgage financier Hypo Real Estate must be rescued. The state is energetically involved in this rescue. Like other fallen banks, Hypo Real Estate's Irish unit Depfa had primarily refinanced itself through securities. This market has been in a desperate state since the Lehman Brothers bankruptcy. Money market funds lost money through the Lehman bankruptcy when their customers withdrew their funds.

3 October 2008:
Tarp (Troubled Assets Relief Program): a rescue programme for wealth assets – what a euphemism. After a good deal of pains the Americans come up with a bank rescue programme, prompting a series of similar initiatives around the globe. These rescue packages typically comprise three basic elements: the state provides money to banks to improve their equity capital base. Furthermore it provides guarantees for their loans. Finally the governments plan to buy up the banks' bad securities. Although many programmes are basically well-put together, to date they have had little effect. At best they have been able to stop additional banks from crashing. The double weight of the financial crisis and the recession has precluded anything else.

Timeline commentary by Manfred Jäger, financial economist at the Institut der deutschen Wirtschaft Köln

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