financial crisis Flashcards
1
Q
CDO in the crisis (2 reasons)
A
CDOs contributed in two ways: first through a lack of transparency aboutthe underlying credit risk which was exacerbated by further rounds of securitisation backed by CDOs, CDO2s etc; second because they enabled banks
to get around capital requirements on leverage by supposed taking the underlying risk off their own balance sheets
2
Q
other factors in the crisis (2)
A
Other factors in the crisis were
(i) low CB interest rates in the US which led to the reach for yield from
riskier investments; high amounts of leverage; failings on the part of ancillary institutions such as credit rating agencies and mortgage brokers and
the structure of compensation in the financial industry which encouraged
risk-taking at all levels
