Financial Crisis II

Question 1

Main aim of ECB /euro system

Answer 1

price stability

Question 2

Main tasks of ECB / Euros system:

Answer 2

Conducting monetary policy for all member states with the aim of achieving price suability by

• issue banknotes
• conduct operation to influence the money supply
• establish minimum reserve requirements for banks
• provide liquidity for banks
• hold and manage feign reserves
• give advices
• monitoring financial stability
• promoting arrangements aimed at ensuring financial stability
• managing financial crisis
• international cooperation

Question 3

role of banks

Answer 3

Financial intermediaries: providing possibilities for financial investment and providing loans
activities of banks: short-term deposits / check accounts, long-term contracts with credit receivers

Risk: if investors want money beck on short notice (minimum reserve requirement, entry requirements)

Question 4

reason for the financial crisis

Answer 4

Fed lowed interest rate at 1% —> everyone wanted money –> cheap credits

credit was so cheap so people borrowed money to buy houses –> investment bankers bought mortgages
Inverstment bankers borrow more money a bought much more mortgage

all this credits together = CDO with some safe, okay, and risky credit.
Safe AAA
okay BBB

Nobody worried about that because when they sold the mortgage to the investor was his problem

a lot of family could not pay interest anymore so left the houses. they put the houses in the sale market –> so many houses in the same market –> more supply than demand -> prices decreases

investors already bought a lot of CDO

Question 5

consequences for Europe

Answer 5

Credit Church: Banks are not lending that much.. slower the process