A Financial Times report published today reveals the high level of equity withdrawal in the run up to the credit crunch in the summer of 2007. It is particularly worrying that equity withdrawal was highest in some of the poorest regions of the UK. Northern Ireland comes out top of the bunch - 74% of those re-mortgaging their properties in the province in 2007 withdrew equity. As a result, those who extracted large amounts of equity may owe more on their mortgage than the actual value of their property even though they bought their home well before the bubble began.
As an undergraduate, I was taught about the failure of Herstatt Bank in 1974 and Herstatt risk. This bank was only the 35th largest bank in Germany at the time so why would anyone be interested in studying its failure? Herstatt failed because of its involvement in risky foreign exchange business. When it closed its doors on 26 June 1974, counterparty banks (mainly in New York) had not received dollars due to them because of time-zone differences - this is known as settlement risk. The cross-jurisdictional implications of its failure resulted in the Bank for International Settlements setting up the Basel Committee on Banking Supervision and Herstatt's failure was a key reason for the establishment of real-time gross settlements systems, which ensures that payments between two banks are executed in real time. The Bank of England's Ben Norman has an interesting post on Herstatt over at the Bank's new blog ( Bank Underground ). As well as giving an excellent overview of