ZEW Financial Market Test - Subprime Crisis: Subprime Crisis: Financial Market Experts Detect Increased Risk for Banking-Sector; Single Bank Failures Expected

According to a current survey of the ZEW-Financial Market Survey, financial market experts have increased their assessment of risk for the worldwide financial system. The Centre for European Economic Research (ZEW) in Mannheim (Germany) has surveyed 235 financial market experts to give their assessment of the impact of the subprime crisis on the stability of the international financial system. According to the survey, 66 percent of the polled experts see high to very high risks for the financial sector. Of those, 18 percent perceive risk to be very high, and 48 percent perceive risk to be high. However, the experts' assessment of risk stops short of predicting failures in the banking-sector on a large scale. Instead, 84 percent of the polled experts expect failures to occur only sporadically.

Furthermore, the experts were asked whether or not the German banking-sector was at higher risk compared to those of other countries in the Euro zone. Due to the occurrence of liquidity crunches exhibited by banks that exceedingly engaged in the subprime segment, the entire German banking sector could suffer a loss of reputation. 37 percent of the polled experts share this opinion. Nevertheless, 50 percent of the analysts cannot identify a risk premium for German banks and evaluate risk to be the same as for other banks in the Euro zone. Additionally, the survey asked if public banks were particularly threatened by the current crisis. This notion was supported by 35 percent of the financial market experts whereas 65 percent do not see such a threat.

Lastly, the experts were asked to give an assessment of the duration of the liquidity crunch in the money market. Ever since the outbreak of the subprime crisis, liquidity is scarce in the money market as a result of raised distrust among banks. Consequently, interest rates in the money market are highly volatile and have reached disproportionately high levels. The answers show that 67 percent anticipate the liquidity problems to last no longer than three months. Of those, 42 percent expect the crisis to be of three months' time horizon, while 20 percent expect a horizon of two months. However, a quarter of the polled participants expect the difficulties to last up to six months.

Contact

Matthias Köhler, E-mail: koehler@zew.de

Dr. Sandra Schmidt, E-mail: s.schmidt@zew.de