Learning objectives: Describe the key factors that led to the housing bubble. Explain the banking industry trends leading up to the liquidity squeeze and assess the triggers for the liquidity crisis. Explain how banks created collateralized debt obligations. Explain the purposes and uses of credit default swaps.
Questions:
700.1. In his review of the global financial crisis (GFC) of 2007-08, Brunnermeier explains that "the bursting of the housing bubble forced banks to write down several hundred billion dollars in bad loans caused by mortgage delinquencies. At the same time, the stock market capitalization of the major banks declined by more than twice as much ... it is useful to recall some key factors leading up to the housing bubble." (He published this in late 2009 while the hangover was ongoing). Each of the following is one of his key factors that led to the housing bubble EXCEPT which was not?
a. Low interest rate environment; ie, cheap credit
b. Lower lending standards enabled by structured products (securitization)
c. Entry of low-quality counterparties into interest rate swap markets without CVA pricing
d. Shift away from traditional banking model where issuing banks hold loans until maturity
700.2. About CDS and CDO, each of the following is true EXCEPT which statement is false?
a. Credit default swaps (CDS) enable the formation of synthetic collateralized debt obligations (CDOs)
b. Buyers of collateralized debt obligations (CDO) tranches can hedge by purchasing credit default swaps (CDS)
c. American International Group (AIG) required a federal bailout in large part due to its written credit default swaps (CDS)
d. In a CDO the super senior tranche is paid only after the other tranches have been paid which is why it offers investors a relatively high interest rate
700.3. Brunnermeier argues that in the lead-up to the crisis, both traditional commercial banks and the shadow banking system were heavily exposed to "maturity mismatch." If a bank is too heavily exposed to maturity mismatch, which of the following is most likely to mitigate the problem?
a. Grant liquidity backstops to its own off-balance sheet vehicles
b: Increase reliance on overnight repurchase agreements (repos)
c. Transfer assets to a off-balance-sheet structured investment vehicle
d. Make trades that increase liquidity coverage and net stable funding ratios (LCR and NSFR)
Answers here:
Questions:
700.1. In his review of the global financial crisis (GFC) of 2007-08, Brunnermeier explains that "the bursting of the housing bubble forced banks to write down several hundred billion dollars in bad loans caused by mortgage delinquencies. At the same time, the stock market capitalization of the major banks declined by more than twice as much ... it is useful to recall some key factors leading up to the housing bubble." (He published this in late 2009 while the hangover was ongoing). Each of the following is one of his key factors that led to the housing bubble EXCEPT which was not?
a. Low interest rate environment; ie, cheap credit
b. Lower lending standards enabled by structured products (securitization)
c. Entry of low-quality counterparties into interest rate swap markets without CVA pricing
d. Shift away from traditional banking model where issuing banks hold loans until maturity
700.2. About CDS and CDO, each of the following is true EXCEPT which statement is false?
a. Credit default swaps (CDS) enable the formation of synthetic collateralized debt obligations (CDOs)
b. Buyers of collateralized debt obligations (CDO) tranches can hedge by purchasing credit default swaps (CDS)
c. American International Group (AIG) required a federal bailout in large part due to its written credit default swaps (CDS)
d. In a CDO the super senior tranche is paid only after the other tranches have been paid which is why it offers investors a relatively high interest rate
700.3. Brunnermeier argues that in the lead-up to the crisis, both traditional commercial banks and the shadow banking system were heavily exposed to "maturity mismatch." If a bank is too heavily exposed to maturity mismatch, which of the following is most likely to mitigate the problem?
a. Grant liquidity backstops to its own off-balance sheet vehicles
b: Increase reliance on overnight repurchase agreements (repos)
c. Transfer assets to a off-balance-sheet structured investment vehicle
d. Make trades that increase liquidity coverage and net stable funding ratios (LCR and NSFR)
Answers here:
Last edited by a moderator:
