Final Exam

Question 1

factors causing the financial crisis

Answer 1

1. deregulation
2. incorrect pricing of credit risk
3. bursting housing bubble
4. complex financial instruments & lack of transparency
5. liquidity & bank failures

Question 2

deregulation

Answer 2

-removing or relaxing certain rules and regulations

-removal of the glass-stegal act caused the mixing of investment and commercial banking

Question 3

incorrect pricing of credit risk

Answer 3

banks would lend money to people to buy homes and wouldn’t charge them enough for the risk, eventually these people couldn’t pay the bank back and they lost so much money

Question 4

bursting housing bubble

Answer 4

people kept buying homes which caused for the prices of homes to rise. these people couldn’t really afford these homes and the housing market dropped causing the prices to drop at a very low price and people couldn’t sell their homes at the high price they originally bought them for.

Question 5

complex financial instruments and lack of transparency

Answer 5

institutions failed to write down the value of their assets appropriately

Question 6

bank leverage

Answer 6

measure of how much a bank is borrowing compared to the capital it has on hand

-leverage magnifies returns

-banks would use SIVs to hold the securities off their books

Question 7

liquidity crisis

Answer 7

businesses can’t get a hold of the money they need quickly and that basically triggered the housing bubble.

-an example is bear stearns, they couldn’t acquire a short-term loan

Question 8

what caused housing bubble to burst?

Answer 8

-subprime mortgages were given

-housing prices went up because demand went up, became to expensive

-banks did too many risky practices