quiz 12 Flashcards
(20 cards)
A major disruption in financial markets characterized by sharp declines in asset prices and firm failures is called a ________.
Financial crisis
A serious consequence of a financial crisis is a contraction in ________.
Economic activity
When the value of loans begins to drop, the net worth of financial institutions falls causing them to cut back on lending in a process called ________.
Deleveraging
When financial institutions go on a lending spree and expand their lending at a rapid pace they are participating in a ________.
Credit boom
The ________, the difference between the interest rate on Baa corporate bonds and U.S. Treasury bonds, rose sharply during the Great Depression.
Credit spread
A ________ pays out cash flows from a collection of assets in different tranches, with the highest-rated tranche paying out first.
Collateralized debt obligation (CDO)
Most U.S. financial crises have started during periods of ________, either after the start of a recession, a stock market crash, or the failure of a major financial institution.
High uncertainty
An important factor in producing the subprime mortgage crisis was ________ consumer protection regulation.
Lax
Debt deflation occurs when an economic downturn causes the price level to fall and a deterioration in firms’ ________ because of the increased burden of indebtedness.
Net worth
A possible sequence for the three stages of a financial crisis might be ________ leads to ________ leads to ________.
Asset price declines → banking crises → unanticipated decline in price level
________ is a process of bundling together smaller loans (like mortgages) into standard debt securities.
Securitization
The originate-to-distribute business model has a serious ________ problem since the mortgage broker has little incentive to make sure the mortgagee is a good credit risk.
Principal-agent
If mortgage brokers do not make a strong effort to evaluate whether the borrower can pay off a loan, this creates a ________ problem.
Severe adverse selection
The growth of the subprime mortgage market led to increased ________ for houses and helped fuel the boom in housing prices.
Demand
The global financial crisis of 2007–2009 not only led to a worldwide recession but also a ________ in the European nations that use the euro currency.
Sovereign debt crisis
In order to ensure that borrowers have an ability to repay residential mortgages, the new consumer protection legislation requires lenders to do all of the following EXCEPT ________.
Verify that the borrower can read and understand a loan contract
Microprudential supervision focuses on the safety and soundness of ________.
Individual financial institutions
The Volcker Rule addresses the off-balance-sheet problem involving ________ risks.
Trading
The global financial crisis showed the need for increased financial regulation; however, too much or poorly designed regulation could ________.
Choke off financial innovation
Dodd-Frank addressed many of the issues that led to the financial crisis. One thing that was NOT addressed by Dodd-Frank regulations was ________.
Privately owned, government-sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac
