Amplification Mechanism Of The Balance Sheet Of The U.s. Subprime Mortgage Crisis

Based on analyzing the background and evolution of the U.S. subprime mortgage crisis, thisdissertation reveals the mechanism that amplify the subprime mortgage crisis into the globalfinancial crisis from the perspective of financial institutions' balance sheets, and develops atheoretical framework for analyzing the balance sheet amplification mechanism of the financialcrisis. Accordingly to this clue, this dissertation presents and demonstrates the followingsub-propositions by combining with some of the stylized facts of financial institutions' balancesheets adjustment in the crisis after perusing much relevant literature.1. Tighter the debt financial constraints for financial institutions and (or) the effective riskaversion of financial institutions to rise may trigger positive feedback loops between financialinstitutions' balance sheet adjustments and asset prices lower, and thus amplify the crisis.2. Systemically important financial institutions subjected to the impact of negative shocks maymake financial network that arise from the interconnections among financial institutions' balancesheets as shock amplifiers.3. The positive feedback loop between financial institutions' balance sheets deterioration andreal economy decline may cause a downward spiral of the financial system and the real economy.4. Contagion through multinational financial institutions' balance sheets may form positivefeedback loops between the initial crisis country's financial institutions to shrink balance sheets andthe being infected country's financial institutions to shrink balance sheets, and thus lead to a globecrisis.5. The Balance sheet amplification mechanism during crises to play the role requires a certaininitial conditions, and the financial system before the subprime crisis has been in continuousaccumulation of these conditions.The conclusion of this dissertation as follows: under the initial conditions, the relatively smallinitial negative shock may be amplified into a systemic impact of the financial markets through thepositive feedback mechanism be caused by financial institutions' balance sheet adjustments, andhave serious consequences for the real economy. There is a balance sheet amplification mechanismin the U.S. subprime mortgage crisis evolved into a global financial crisis.