Intermediaries Slide 13&14 RVW Flashcards
(20 cards)
What is a financial crisis?
A significant disruption in financial markets caused by sharp asset price declines, liquidity shortages, and insolvencies, leading to broad economic repercussions.
What are the core ingredients of financial crises?
- Asset Price Bubbles
- Excessive Leverage
- Liquidity Crunches
- Contagion Effects
What was the economic impact of the Tulip Mania (1630s)?
Minimal impact; it involved private speculation without a leveraged financial system.
How did the Mississippi Bubble (1720) affect France?
Severe economic downturn due to bank runs and credit contraction.
What are the three main types of financial crises?
- Banking Crises
- Currency Crises
- Sovereign Debt Crises
What are the phases of Minsky’s Financial Instability Hypothesis?
- Hedge Financing
- Speculative Financing
- Ponzi Financing
- Crisis
How does Fisher’s Debt-Deflation Theory explain crises?
Falling asset prices increase debt burdens, triggering forced liquidations and a deflationary spiral.
What were the causes of the 2008 Global Financial Crisis?
Excessive leverage, subprime lending, speculative housing bubbles, and shadow banking risks.
What were key reforms after the 2008 crisis?
- Dodd-Frank Act
- Basel III
What is the role of transparency in preventing crises?
It helps monitor systemic risks and reduces uncertainty in financial markets.
What is credit risk?
The risk that borrowers may default or delay loan repayments.
What are the two key issues caused by information asymmetry in credit risk?
- Adverse Selection
- Moral Hazard
Name two tools banks use to manage credit risk.
- Screening and Monitoring
- Collateral
What is interest-rate risk?
The risk that changes in market rates will affect a bank’s assets, liabilities, or income.
How does Income Gap Analysis help manage interest-rate risk?
It measures how changes in interest rates affect net income by analyzing rate-sensitive assets and liabilities.
What is Duration Gap Analysis?
It evaluates the sensitivity of a bank’s net worth to changes in interest rates based on the duration of assets and liabilities.
What happened to Silicon Valley Bank due to poor interest-rate risk management?
Rising rates caused unrealized losses on long-term Treasury bonds, triggering depositor panic and a bank run.
What is hedging in financial risk management?
Engaging in financial transactions to reduce or eliminate risk.
How do interest-rate swaps work?
They exchange fixed-rate payments for variable rates or vice versa to stabilize interest costs.
What replaced LIBOR for USD transactions?
The Secured Overnight Financing Rate (SOFR).
