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FINA 465 Exam 1 Fin Cris Pt 1 With Complete Solutions.
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FINA 465 Exam 1 Fin Cris Pt 1 WithComplete Solutions
AlanbGreenspanb-bcorrectbanswer-
"Increasinglybcomplexbfinancialbinstrumentsbhavebcontributedbtobthebdevelopmentbofbabfarbmorebflexible,b
efficientbandbhencebresilientbfinancialbsystembthanbthebonebthatbexistedbabquarterbcenturybago."
PaulbVolckerb-bcorrectbanswer-"Thebbrightbnewbfinancialbsystemb-
bforballbitsbrichbrewardsbandbunimaginablebwealthbforbsomeb-
bhasbfailedbthebtestbofbthebmarketplacebbybrepeatedlybriskingbabcascadingbbreakdownbofbthebsystembasbabw
hole."
BankingbCrisesb-bcorrectbanswer-Crisesbthatboriginatebinbthebbankingbsector
MarketbCrisesb-bcorrectbanswer-Crisesbthatboriginatebinbthebcapitalbmarkets
ExamplesbofbBankingbCrisesb-bcorrectbanswer-Theb1990-
1992b"creditbcrunch,"binbwhichbbankbcreditbsupplybdriedbupbsignificantly.b
Causedbbybfallbinbcapitalbfrombloanblosses,bincreasesbinbregulatorybcapitalbrequirements,bandbincreasesbinbs
upervisorybtoughness.b
Theb2007:Q3-2009:Q4bfinancialbcrisisbwasbabbankingbcrisis.b
Originatedbwithblossesbonbsubprimebmortgagesbmadebbybbanksbandbthebsecuritiesblinkedbtobthesebmortga
ges
ExamplesbofbMarketbCrisesb-bcorrectbanswer-
ThebstockbmarketbcrashbonbOctoberb19th,b1987bwasbabmarketbcrisis.b
Spurredbbybabbubblebinbstockbpricesbthatbwasbpoppedbbybsomebtaxblegislationbandbmarketbnews.b
Exacerbatedbbybprogrambtrading,bwhichboverwhelmedbmanybsystems.
, Theb1998:Q3-1998:Q4bRussianbDebtbCrisisboriginatedbfrombRussiabdefaultingbonbitsbsovereignbdebt.b
Drovebwildbswingsbinbsovereignbdebtbpricesbglobally.
HedgebfundbLong-
TermbCapitalbManagementb(LTCM)bwasbbailedboutbbybthebNewbYorkbFederalbReserveb(theyb"encouraged"bb
anksbtoblendbtobLTCM)bbecausebitbspeculatedbonbsovereignbdebtbpricesbandbfunctionedbwithblittlebcapital.
Whatbisbabcreditbcrunch?b-bcorrectbanswer-Abcontractionbinbthebsupplybofbcredit
OtherbEvidencebShowsbMorebClearlybabDecreasebinbSupplybofbCreditb-bcorrectbanswer-
Fed'sbSeniorbLoanbOfficerbOpinionbSurveyb(SLOOS)bbeganbshowingbsubstantialb"tightening"bloanbstandards
binbearlyb2007.
BybthebOctoberb2008bsurvey,bthebnetbpercentagesbofblargebbanksbandbsmallerbbanksbthatbreportedbabtighte
ningbofbstandardsbtoblargerbfirmsbwasb84.4%bandb82.6%brespectively,bandbtobsmallbfirmsbwasb71.9%bandb78
.3%brespectively.bNonebofbthebsurveyedbbanksbreportedbanybeasingbofbstandards.
Thisbclearlybdemonstratesbabcreditbcrunchbwasbunderway.
FedbSeniorbLoanbOfficerbOpinionbSurveyb-bcorrectbanswer-
Banksbstartedbtighteningbtheirblendingbstandardsbsignificantlybinb2007ballbthebwaybthroughb2008.
Tighteningbpeakedbatbthebendbofb2008bbutbcontinuedbthroughb2009.
LiquiditybContractionb(Liquidity=LiquiditybCreation)b-bcorrectbanswer-
Bankbliquiditybcreationbisbthebliquiditybcreatedbbybbanksbforbthebpublic.
Commercialbloansbandbtransactionsbdepositsbcontributebpositivelybtobliquiditybcreationbbecausebthebbanks
btakebsomethingbilliquidbawaybfrombthebpublicbandbgivebthembsomethingbliquid.b
Bankbsecuritiesbandbequitybcontributebnegativelybtobliquiditybcreationbbecausebtheybtakebsomethingbliquid
bawaybfrombthebpublicbandbgivebthembsomethingbilliquid.
LiquiditybContraction:bLiquiditybHoardingb-bcorrectbanswer-
Bankbliquiditybhoardingbisbthebliquiditybhoardedbbybbanksbfrombthebpublic.b
Cashbandbsecuritiesbheldbbybbanksbcontributebpositivelybtobliquiditybhoardingbandbcommercialbloansbcontri
butebnegativelybtobliquiditybhoardingbbecausebtheybarebtakingbliquiditybawaybfrombthebpublic.b
Bankbdepositsbandbequitybcontributebpositivelybtobliquiditybhoardingbbecausebtheybraisebliquiditybfrombthe
bpublic.
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