Chapter 10 Banking and the Management of Financial Institutions Essay

Factors Causing Financial Crises1) A major disruption in monetary securities industrys characterized by disconnected blood lines in asset prices and firm failures is called a A) monetary crisis.2) A monetary crisis occurs when an profit in asymmetric information from a disruption in the pecuniary system A) attempts grueling adverse selection and moral hazard problems that shambling fiscal securities industrys incapable of channeling funds efficiently.3) A serious consequence of a fiscal crisis isA) a compressing in sparing activity.4) A sharp decline in the channel securities industry means that the ________ of corporations has finaliseen qualification lenders ________ willing to lend. A) net worth less(prenominal)5) A sharp stock mart decline increases moral hazard incentives A) since acquire firms dedicate less to lose if their investments fail.6) An unanticipated decline in the price determine aim increases the substance of debt on acceptation firms only when does not raise the real pry of borrowing firms assets. The result is A) that net worth in real scathe declines.7) If debt contracts are denominated in impertinent currency, then an unanticipated decline in the respect of the domestic currency results in A) a decline in a firms net worth.8) Factors that lead to worsening conditions in monetary markets include C) the deterioration in cusss offset sheets.9) In a bank panic, the source of contagion is theD) asymmetric information problem.10) A bank panic coffin nail lead to a severe contraction in economic activity due to D) a decline in add for productive investment.11) In addition to having a direct effect on increase adverse selection problems, increases in interest rank also enhance financial crises by ________ firms and households interest payments, thereby ________ their cash flow. B) increasing decreasing12) In emerge economies, government fiscal imbalances may cause fears of B) default on government debt.9.2 Dynamics of Past U.S. Financial Crises1) When financial institutions go on a bring spree and expand their lending at a rapid pace they are participating in a A) credit boom.2) When the value of loans pops to drop, the net worth of financial institutions travel causing them to cut back on lending in a process called A) deleveraging.3) When financial intermediaries deleverage, firms cannot fund investment opportunities resulting in A) a contraction of economic activity.4) A credit boom can lead to a(n) ________ much(prenominal) as we saw in the tech stock market in the late 1990s. A) asset-price bubble5) Many 19th century U.S. financial crises were started byA) spikes in interest rates.6) Most U.S. financial crises have started during periods of ________ either later the start of a recession or a stock market crash. A) high uncertainty7) If uncertainty ab push through banks health causes depositors to begin to absorb their funds from banks, the country experiences a(n) A) bankin g crisis.8) Debt deflation occurs whenA) an economic downturn causes the price level to fall and a deterioration in firms net worth because of the increased outcome of indebtedness.9) A substantial decrease in the aggregate price level that reduces firms net worth may stall a recovery from a recession. This process is called A) debt deflation.10) A possible sequence for the three stages of a financial crisis in the U.S. might be ________ leads to ________ leads to ________. A) asset price declines banking crises unanticipated decline in price level 11) The economy recovers quickly from most recessions, but the increase in adverse selection and moral hazard problems in the credit markets caused by ________ led to the severe economic contraction cognize as The Great Depression. A) debt deflation9.3 The Subprime Financial Crisis of 2007-20081) Financial innovations that emerged later on 2000 in the owe markets include all of the following keep out A) adjustable-rate owes.2) _____ ___ is a process of roll up together smaller loans (like mortgages) into standard debt securities. A) Securitization3) A ________ pays out cash flows from subprime mortgage-backed securities in different tranches, with the highest-rated tranch paying out first, while lower ones paid out less if there were losses on the mortgage-backed securities. A) Collateralized debt obligation (CDO)4) The growth of the subprime mortgage market led toA) increased demand for houses and helped fuel the boom in hold prices.5) The originate-to-distribute business model has a serious ________ problem since the mortgage broker has little incentive to make sure that the mortgagee is a good credit risk. A) hotshot-agent6) Mortgage brokers often did not make a strong effort to evaluate whether the borrower could pay mangle the loan. This created a A) severe adverse selection problem.7) Agency problems in the subprime mortgage market included all of the following except A) homeowners could refinance the ir houses with larger loans when their homes appreciated in value.8) When housing prices began to decline after their peak in 2006, many a(prenominal) subprime borrowers make that their mortgages were underwater. This meant that A) the value of the house fell below the amount of the mortgage.9) Although the subprime mortgage market problem began in the United States, the first indication of the seriousness of the crisis began in A) Europe.10) Like a CDO, a structured investment vehicle pays off cash flows from pools of assets, however, rather than long-term debt the structured investment vehicle backs A) mercantile paper.11) Which investment bank filed for failure on September 15, 2008 making it the largest bankruptcy filing in U.S. level? A) Lehman Brothers12) The largest bank failure in U.S. history was ________ which went into receivership by the FDIC on September 25, 2008. A) Washington Mutual13) Credit market problems of adverse selection and moral hazard increased as a res ult of all of the following except A) increase in housing market prices.14) The Economic Recovery Act of 2008 had several provisions to promote recovery from the subprime financial crisis. These provisions included all of the following except A) guaranteed all the deposits of the commercial banks.15) The government bailout of troubled financial institutions occurred in theU.S. and many other countries. Which country saw their banking system collapse requiring the government to take over its three largest banks? A) Iceland9.4 Dynamics of Financial Crises in Emerging commercialise Economies1) Financial crises generally develop along two basic paths A) mismanagement of financial liberalization/globalization and severe fiscal imbalances.2) In emerging market countries, the deterioration in banks balance sheets has much ________ effects on lending and economic activity than in advanced(a) countries. A) negative3) The mismanagement of financial liberalization in emerging market countr ies can be understood as a severe ________. A) principal/agent problem4) Factors likely to cause a financial crisis in emerging market countries include A) fiscal imbalances.5) The two key factors that set out speculative attacks on emerging market currencies are A) deterioration in bank balance sheets and severe fiscal imbalances.6) Severe fiscal imbalances can directly trigger a currency crisis since A) investors fear that the government may not be able to pay back the debt and so begin to sell domestic currency.7) In emerging market countries, many firms have debt denominated in foreign currency like the dollar or yen. A depreciation of the domestic currency A) results in increases in the firms indebtedness in domestic currency terms, even though the value of their assets remains unchanged. 8) A sharp depreciation of the domestic currency after a currency crisis leads to A) higher inflation.9) The key factor leading to the financial crises in Mexico and the EastAsian countries w as A) a deterioration in banks balance sheets because of increasing loan losses.10) Factors that led to worsening conditions in Mexicos 1994-1995 financial markets include C) increased uncertainty from political shocks.11) Factors that led to worsening financial market conditions in East Asia in 1997-1998 include A) weak command by bank regulators.12) Factors that led to worsening conditions in Mexicos 1994-1995 financial markets, but did not lead to worsening financial market conditions in East Asia in 1997-1998 include A) rise in interest rates abroad.13) Argentinas financial crisis was due toC) fiscal imbalances.14) A lark of debt markets in emerging-market countries is that debt contracts are typically ________. A) very short term15) The economic hardship resulting from a financial crises is severe, however, there are also societal consequences such as A) increased crime.16) Before the South Korean financial crisis, sales by the top five chaebols (family-owned conglomerates) were A) nearly 50% of GDP.17) The chaebols advance the Korean government to open up Korean financial markets to foreign capital. The Korean government responded by A) allowing unlimited short-term foreign borrowing but maintained quantity restrictions on long-term foreign borrowing by financial institutions.18) At the time of the South Korean financial crisis, the government allowed many chaebol owned finance companies to convert to merchant banks. finance companies ________ allowed to borrow abroad and merchant banks ________. A) were not could borrow abroad19) At the time of the South Korean financial crisis, the merchant banks were A) almost well-nigh unregulated.