Financial Crisis II

Question 0

Subprime Panic

Answer 0

Awareness that many financial institiond were affected by the losses in the subprime mortgage market.

-> lower funding and market liquidity
+ increasing margins
-> difficulties to roll over liabilities
-> institutions were forced to sell assets
but market liquidity was very low especially for securities whose value was dependent on subprime mortgages
-> FIRE SALE PRICES
-> further losses = reduction in equity capital
-> LOSS SPIRAL

Question 1

Decline in House Prices USA 2007

Answer 1

• > large losses in subprime mortgage market
• > affected large institutions because of the activities of their SIVs and ABCP conduits (link with cards Financial Crisis I!!!!)
• > Awareness that many financial institutions were affected by these losses

Question 2

Loss Spiral

Answer 2

LOSSES LEAD TO REDUCTIONS IN FUNDING LIQUIDITY THAT CAUSED FINANCIAL INSTITUTIONS TO SELL ASSETS AT FIRE-SALE PRICES IN ILLIQUID MARKETS.