FRM Level 1, Book 1, Chapter 10 – Anatomy of the Great Financial Crisis

In this FRM Part 1 exam prep lesson, we examine the liquidity crunch that emerged when both the repo market and the commercial paper market froze during the Global Financial Crisis. This video explains how the funding shock unfolded in practice, using exam-relevant indicators such as the repo haircut index and the LIBOR–OIS spread. For FRM Level 1 candidates, understanding these barometers of funding stress is essential. An increase in the repo haircut signals tightening collateralized funding conditions, while a widening LIBOR–OIS spread reflects stress in unsecured interbank markets. Both indicators remained stable until September 2007 before sharply deteriorating, and the bankruptcy of Lehman Brothers in September 2008 intensified the crisis, triggering a systemic liquidity freeze.
We walk step-by-step through the balance sheet mechanics of a liquidity crunch, a highly testable concept in the GARP FRM curriculum. Using a simplified bank balance sheet, we demonstrate how an increase in repo haircuts reduces short-term funding, creates a funding shortfall, and forces asset sales. We then show how falling asset prices can transform a liquidity problem into insolvency risk — a central theme of the 2007–2008 financial crisis. This lesson directly supports your understanding of funding liquidity risk, market liquidity risk, balance sheet contraction, fire sales, and crisis transmission mechanisms, all key topics for the FRM Part 1 exam.
This video is part of a comprehensive Financial Risk Manager (FRM) Level 1 course aligned with the official GARP FRM syllabus, designed to provide clear, structured, and exam-focused explanations. If you are preparing for the FRM exam and want deep conceptual clarity with practical illustrations, visit my website for full course access and additional study materials.

FRM Level 1, FRM Part 1, GARP FRM, Financial Risk Manager exam prep, liquidity crunch, repo market, repurchase agreements, repo haircut index, LIBOR OIS spread, funding liquidity risk, market liquidity risk, Global Financial Crisis 2008, Lehman Brothers bankruptcy, wholesale funding markets, commercial paper market freeze, balance sheet mechanics, bank funding risk, fire sales, insolvency risk, FRM liquidity risk topic

All visuals, voice, and narration are original creations by Braia Renata

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