Financial crisis 2007-2009

Question 1

The genesis of the crisis

Answer 1

1) The Fed’s expansionary monetary policy to reduce the cost of credit
2) Subprime mortgages
3) Mortgage securitisation

Question 2

CDS

Answer 2

1) Credit default swap
2) Debt Repayment/Default Bet
3) The level of risk depends on credit rating agencies

Question 3

Fed interest rate hikes in 2004

Answer 3

1) Supply shock in commodity markets
2) Inflationary impulses -> raising interest rates by banks -> households have difficulty paying off mortgages -> bank occupancy
3) Decline in real estate prices on the market -> decrease in the value of mortgage collateral

Question 4

The global impact of the crisis

Answer 4

1) European and American banks linked by securitised mortgages
2) Sudden impairment of securitised securities through sudden selling
3) Interbank confidence crisis
4) Reduction of lending – transfer of the crisis to the real zone

Question 5

Factors exacerbating the crisis

Answer 5

1) Deregulation of banking and financial markets
2) Shadow banking – unregulated non-banking institutions providing banking services
3) Increased use of leverage
4) Investments in the US financed by foreign savings – > spillover of the crisis to other countries
5) Excess global savings (?)

Question 6

Anti-crisis actions in the USA

Answer 6

1) Paulson Plan – Buyout of Problematic Assets by the Government

Question 7

Crisis in Europe

Answer 7

1) Bankruptcy of systemically important banks in Iceland
2) The threat of bankruptcy of most European banks
3) Collapse of confidence in the interbank market – a decrease in liquidity
4) 3 phases of the crisis in Europe

Question 8

describe phase one

Answer 8

1) Decline in confidence in subprime-based instruments
2) The problem of liquidity shortage in the banking market
3) Enhanced ECB refinancing operations with an extended maturity

Question 9

Phase II

Answer 9

1) After the collapse of Lehman Brothers – a sharp sell-off of securities by banks
2) Liquidity hoarding – accumulation of excessive liquidity by banks
3) ECB interest rate cut – intensification of refinancing operations

Question 10

Phase III

Answer 10

1) May 2010 – Greece publishes a report on its public finances
2) Greece’s likely insolvency – a decline in confidence in Greek government bonds and peripheral countries
3) The feedback loop between the banking crisis and the public finance crisis

Question 11

Anti-crisis measures in Europe

Answer 11

1) ECB - Extraordinary monetary policy measures
2) Establishment of the European Banking Authority – new banking regulations
3) Recapitalisation of banks

Question 12

Global impact of the crisis

Answer 12

1) Reduction of lending by banks
2) Decline in production, increase in unemployment
3) Straining the public finances of countries that had to save their own banks