Week 5 Flashcards
What was the pre crisis environment and trends in the banking industry
low interest rates, increase in housing demand an housing invention, search for high yield returns for banks, financial innovation
what were the steps of securitazion process
- form a portfolio of mortgages, other loans, credit card loans etc.
- slice the portfolio into different tranches
- sell the tranches to investors with different risk preferences
what is credit enhancement
a process of making a security safer or reducing its risk to make it more attractive to investors
what are the correlation of defaults?
- uncorrelated default = safer senior tranches
- high correlation of default = less safe senior tranches
- perfectly correlated = no credit enhancement
explain the proces of securitization in two cases
case 1; did not take place in reality
case 2; investors werent keen on long term ABS sold by SPV’s
(explain in more detail)
what is a credit default swap?
a way in which investors can insure themselves against default
What are the pros of securitzation
additional liquidity for originator banks
democratization of credit
reduced capital requirements
transfer of credit risk
diversificiation of portfolios for investors
additional income for banks
what are the cons of securitzation
principal agent (agency) problem
lack of transparency and high complexitiy
conflict of interest at credit rating agencies and use of poor statistical models
maturity mismatch
supporting credit lines
profit driven pressure
What were the reasons for banks holding structured products?
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Explain how the great financial crisis started to unfold
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Explain the stages of the great financial crisis
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What are the general features of a financial crisis?
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Explain the dynamics of crises in advanced economies
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Explain the dynamics of crises in emerging market economies
What were the major developments before the EAC
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What were the vulnerabilities that started to build up in the EAC
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Why was the crisis becoming inevitable in EAC?
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Explain the economic pressure that emerged in Thailand in EAC
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What were the major developments before the IC?
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how did the IC start and end?
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