New on FinoLib · Volume II: Capital Markets
I have just published a new article on FinoLib, my free finance education library: Financial Crises: Why They Repeat, the Pattern Across Every Case. It is part of Volume II: Capital Markets. Below is a summary of the topic in plain, expert language, so you can follow the idea even before you open the full article.
The idea in plain words
Every crisis in this Part, from tulips to Credit Suisse, had the same ingredients: a trigger, leverage or borrowed funding, a liquidity mismatch, a regulatory gap and someone who was surprised. The mismatch decides how fast a fall becomes a fire sale. When forced selling approaches a day’s market volume, a central bank or a group of banks has had to step in.
Key points
■Bubbles need a detached narrative; runs such as UK LDI and Credit Suisse do not.
■Measure the mismatch as forced selling ÷ normal daily volume: 38% of a day in 1987, 4.2 days for gilts in 2022.
■Solvency tests are not enough; run a one-week cash test.
■Rescues can rewrite the order of losses, as AT1 holders learned.
A closer look
Section 10.7: The Repeating Pattern — What Every Bubble and Crisis Shares’s stages describe bubbles. This table uses five features that fit every case in this Part: the trigger that started the fall, the leverage that turned price losses into forced selling, the liquidity mismatch (claims that could be pulled faster than assets could be sold), the regulatory gap the case exposed, and who was surprised. The 2008 row summarizes Volume I’s Part 3.
Under the hood
Under the Hood: Measuring a Liquidity Mismatch
The mismatch decides speed. Measure it as forced selling divided by what the market normally absorbs. Case Forced selling or withdrawal Market capacity Ratio 1987 $8 billion of model-required selling still unexecuted entering October 19 ($12 billion called for less $4 billion sold) About $21 billion of NYSE sales on October 19 8 ÷ 21 = 38% of that day’s sales UK LDI, 2022 At least £50 billion of gilt sales expected About £12 billion of normal daily trading 50 ÷ 12 = 4.2 days of all trading Near or above one day’s volume, the forced seller sets the price, and a central bank or group of banks steps in…
Decision rule
Score any institution or position on the five columns. Trigger: name two events, including your own government’s actions, that would force a sale. Leverage: compute the fall that wipes out capital, 1 ÷ leverage. Mismatch: divide the cash that could be demanded within a week by the cash and sellable assets on hand. Gap: ask which rule covers this structure. Surprise: ask who believes they are protected, and why.
The costliest mistake
Testing solvency and skipping liquidity. Most UK pension schemes in 2022 were solvent and Credit Suisse met its capital requirements, yet one market needed £19.3 billion of central bank buying and the other bank a weekend takeover. Expected LDI forced sales equaled 50 ÷ 12 = 4.2 days of all gilt trading. Run a cash test: the largest collateral or withdrawal call in a stressed week against the cash you can raise without fire sales.
Edge Cases: When the Standard Answer Changes
The table is a checklist, not a forecast. Situation What changes Why A bubble in equity-funded firms Expect a large price fall with smaller credit losses With little debt inside the firms, losses stay mostly with shareholders (dot-com, 2000) Leverage without a bubble Solvency tests pass; run a cash test instead LDI liabilities fell with gilt prices, yet funds still ran out of cash Fraud at the core Reported numbers cannot be used; verify collateral and exposure yourself Fake receipts…
India Lens: Three Indian Failures and the Rules They Left
India supplies three of this Part’s cases, one for each of the columns that regulators can most easily fix. Volume I’s Part 10 covers the 1991 balance-of-payments crisis, the fourth great Indian episode. Column Indian case Rule now in force Collateral and settlement Harshad Mehta, 1992: bank receipts with no bonds behind them; ₹3,018.63 crore of hard-to-recover bank exposures Special court and attachment of property (1992); securities held in dematerialized form, as Volume I’s Part 1 and Part 11 describe…
Recap
Across all fifteen cases the repeating features are a trigger, leverage or borrowed funding, a liquidity mismatch, a regulatory gap and someone who was surprised. Measuring the mismatch as forced selling against normal daily volume shows why some crises needed a central bank within days, and why a cash test matters as much as a solvency test.
What the full article covers
The full article includes a look under the hood at the mechanics, a clear decision rule, the one mistake that costs people the most, a recap, a reveal-on-click quiz and the official sources behind every figure.
Volume II: Capital Markets
Read the full article on FinoLib
The complete article, Financial Crises: Why They Repeat, the Pattern Across Every Case, with every worked example, diagram, quiz and source, is free to read in Volume II, Capital Markets on finolib.com.
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