Financial Crisis

Question 1

Trade Crisis

Answer 1

Crisis can occur from global trade imbalances

Question 2

German/Greek Lesson

Answer 2

Insisting on austerity and conventional repayment rather than growth and debtor’s ability to pay means there is a significant risk of debts never being paid off

Question 3

Finnacial Crisis

Answer 3

Moral hazard within the financial sector can lead to irresponsible lending

Question 4

Finnance sector Lesson

Answer 4

Missing was consideration of institutional weaknesses on the supply side of finance for irresponsible borrowing cannot occur without irresponsible lending

Question 5

National Crisis

Answer 5

The assumption that countries are safe creditors as they can never go bust

Question 6

National debt Lesson

Answer 6

Governments offer no collateral and only honour debts to ensure future funding while there’s no official process to cope with defaults

Question 7

Stock market Crisis

Answer 7

Stock markets play key role in capital allocation permitting investors to withdraw funds from struggling industry to invest elsewhere

Question 8

Risk Lesson

Answer 8

Uncertainty is different to risk, as it implies that the probabilities of some events are unknowable, and that therefore mathematical models have there limits

Question 9

Which lesson did the 2008 crisis result from?

Answer 9

All of them

Question 10

Which lesson did the Greek crisis result from?

Answer 10

Conventional repayment failure

Question 11

Why is trade an issue today? (2)

Answer 11

Trade balances should automatically correct themselves in the free market however exporters such as China create an artificially low ER
Trade balances are being invested not spent

Question 12

Cost of trade imbalance

Answer 12

Surplus- Can create speculative bubbles that are destructive

Deficit- Leakage in circular flow of income

Question 13

3 risk management strategies

Answer 13

Internal risk assessment of loan
Credit rating agency approval
Bank taking out insurance in case of default (CDS)

Question 14

Problem with internal risk assessment

Answer 14

Traders have more influence as risk assessment limit the profitability of risk taking

Question 15

Problem with credit rating agency

Answer 15

As banks own shares in credit raters creating conflict of interest and they’re methods are flawed they often tell traders what they want to hear

Question 16

Problem with CDS

Answer 16

Price of CDS is the result of speculation and its true value is unkown to the insuror while CDS has no regulation

Question 17

Too big to fail

Answer 17

Some banks are so large gov’s can’t allow their failure plus they lobby effectively(regulatory capture)

Question 18

The Basle accord

Answer 18

Requires banks to hold a counter-cyclical amount of capital relative to loans with the ratio rising during boom periods

Question 19

3 ways the Basle accord should be effective during a boom

Answer 19

Reduce the rate of increase in credit
Encourage smart loans as banks risk their capital
Larger banks’ issues are less likely to compromise others

Question 20

Keynesian counter cyclical policy

Answer 20

Governments should run budget deficits during booms and avoid austerity during reccesion

Question 21

3 more ways to regulate banks

Answer 21

Align incentives with long term creation
Regulate credit agencies
Standardise rules and remove loop holes