Central banks had been supplying short-term funding to smooth needed adjustments in the banking sector, but that alone could not stem bank losses. So what had been addressed as a liquidity crisis was confirmed to be a solvency crisis.

Moreover, the possibility of assumingly risk-free securitization resulted in low ratios of capital6 held by many banks. From 2006 onwards, the housing prices in the US turned downwards. Banks reacted by increasing their interest rates. Many home-owners whose equity had become negative and now faced rising interest rates defaulted on their loans. This behavior was conveyed by the non-recourse nature of the US mortgage loans. The financial sector's situation deteriorated further because many banks cut back on lending and sold assets - frequently at fire-sale prices - in order to preserve their capital (Blanchard 2009; Lin - Martin 2009). The now nearly worthless derivatives, consisting to a large extent of CDO's of the failing American subprime mortgage market, got the financial crisis finally going, although other factors were contributing to it as well. Early on, many thought that the ECA region was sufficiently decoupled from the sophisticated Western financial systems. ECA has not had a subprime mortgage crisis, for instance. On the one hand, many countries in the ECA region had witnessed rapid growth and wealth creation in recent years. On the other hand, most countries were in the state of a difficult fiscal situation with large budget deficits.

These budget deficits had been financed by the international financial market but had become unsustainable under the changed financial climate. As a result, the governments in the ECA region - other than the EU-15 or the US - faced limited possibilities to launch rescue packages for the banking sector and stimulating packages for the economy. Thus, the crisis has shown that in an increasingly inter-connected world, there are always knock-on effects. Countries, which are the home base of cross-border banking activities, for instance in emerging economies in CEE are strongly affected despite their abstinence from the securitization market (EC 2009).

The macroeconomic imbalances in some countries, which were often fiscal in nature, aggravated the situation (World Bank 2010). The ongoing recession is thus likely to leave deep and long-lasting traces on economic performance and entail social hardship of many kinds. Subsequently, many financial market experts called for a higher equity capital ratio for banks. This ratio lies presently at 4%, the recommended level is 8%. Nevertheless, for the future, figures between 10-20% are discussed. The recommendations from the G20 (Group of 20 Finance

Ministers and Central Bank Governors) Summit in Pittsburgh, 24-25 September 2009 go towards this direction. Nevertheless, international rules should be implemented by 2012 to avoid negative effects on the credit supply. The changes in the Capital Requirements Directive of the EU are for the time being unaffected by the G20 recommendations. For a more comprehensive overview see for instance Blanchard (2009), Orlowski (2009) and Lin and Martin (2009).