Chapter 9 Flashcards
Financial Frictions
asymmetric information problems that act as a barrier to efficient allocation of capital are often described by economics
Financial Crisis
occurs when information flows in financial markets experience a particularly large disruption, with the result that financial frictions increase sharply and financial markets stop functioning
Sequence of Events in a Financial Crisis
- Initiation of Financial Crisis
- Banking Crisis
- Debt Deflation
Credit Boom
financial institutions go on a lending spree
Deleveraging
When financial institutions cut back on their lending because they have less capital
Asset-Price Bubble
the rise of asset prices above their fundamental economic values
Bank Panic
multiple banks fail simultaneously
Fire Sales
selling off all assets quickly
Debt Deflation
when a substantial unanticipated decline in the price level sets in, leading to a further deterioration in firms net worth because of the increased burden of indebtedness
Credit Spread
difference between the interest rate on loans to households and businesses and the interest rate on completely safe assets
Securitization
the process of transforming illiquid financial assets into marketable capital market instruments
Subprime Mortgages
mortgages for borrowers with less than stellar credit records
Mortgage-Backed Securities
securities that cheaply bundle and quantify the default risk of the underlying high-risk mortgages
Financial Engineering
the process of researching and developing new financial products and services that would meet customer needs and prove profitable
Structured Credit Products
securities that are derived from cash flows of underlying assets and are tailored to have particular risk characteristics that appeal to investors with different preferences
Originate-to-Distribute Model
a business model in which the mortgage is originated by a separate party, typically a mortgage broker, and then distributed to an investor as an underlying asset in a security
Principle-Agent Problem
a moral hazard problem that occurs when the managers in control (agents) act in their own interest rather than in the interest of the owners (principals) due to different sets of incentives
Credit Default Swaps
financial insurance contracts that provide payments to holders of bonds if they default
Shadow Banking System
A system in which bank lending is replaced by lending via the securities market
Repurchase Agreements
an arrangement whereby the Fed, or another party, purchases securities with the understanding that the seller will repurchase them in a short period of time, usually less than a week
Haircuts
the excess amount of collateral above the amount of the loan
Emerging Market Economics
economics in an earlier stage of market development that have recently opened up to the flow of goods and services and capital from the rest of the world
Financial Globalization
the process of economies opening up to flows of capital and financial firms from other nations
Cash Flows
the difference between cash receipts and cash expenditures
Sequence of Events in Emerging Market Financial Crisis
- Initiation of financial crisis
a) mismanagement of financial liberalization/globalization
b) severe fiscal imbalances - Currency crisis
- Full-fledged financial crisis
Speculative Attack
speculators engage in massive sales of currency
Currency Mismatch
when emerging market economies denominate many debt contracts in foreign currency, while their assets are denominated in domestic currency
