IFE S11 The Financial Crisis

Which one of the following was NOT a contributory factor in the 2008 financial crisis?

• Mortgage lending to house buyers who were extremely unlikely to be able to pay their mortgage obligations.

• Scarcity in the global supply of gold mined in Alaska.

• Over-optimistic ratings by the credit rating agencies.

• Financial instruments backed by intangible assets, so that if the instrument itself failed, there were no assets to cover the deficit.

Which one of the following statements is incorrect?

• The 2008 financial crisis was caused by the Chinese government buying too many US government bonds.

• One of the triggers for the sub-prime crisis was the use of low introductory mortgage rates; when they expired, the mortgagees were unable to pay the increased payments.

• Northern Rock took on too many mortgages without sufficient collateral and were unable to continue financing existing mortgage liabilities.

• Bear Sterns relied on the repo market to finance its mortgage loans, using mortgage-backed bonds as collateral for loans.

Which one of the following was not a cause for the 2008 financial crisis?

• Mortgages being sold on by their originating organisation and not being kept on its books as an asset/liability.

• The increasing complexity and interconnectivity of financial instruments.

• Easy availability of mortgages.

• The bonuses paid to employees of pension funds.

SIV is the acronym for…

• Special Interest Vehicle.

• Special Investment Value.

• Structured Investment Vehicle.

• Structured Interest Valuation.

Which one of the following best describes subprime mortgage lending?

• A bank lending to someone who is not one of their customers.

• Lending to people to buy houses who are at greater risk of being unable to meet the repayments.

• Lending on overvalued properties.

• Lending to people who do not have a bank account.

A serious consequence of a financial crisis is…

• financial globalisation.

• financial engineering.

• an economic recession.

• increase in asset prices.

If uncertainty about banks' health causes depositors to begin to withdraw their funds from banks, the country experiences…

• a financial recovery.

• a banking crisis.

• a reduction of the adverse selection and moral hazard problems.

• an increase in information available to investors.

Debt deflation occurs when…

• lenders reduce their lending due to declining stock prices that lowers the value of collaterals.

• rising interest rates worsen adverse selection and moral hazard problems.

• corporations pay back their loans before the scheduled maturity date.

• an economic downturn causes the price level to fall and a deterioration in firms' net worth because of the increased burden of indebtedness.

A possible sequence for the three stages of a financial crisis in an advanced economy might be ________ leads to ________ leads to ________.

• banking crises, increase in interest rates, unanticipated decline in price level

• unanticipated decline in price level, banking crises, increase in interest rates

• banking crises, increase in uncertainty, increase in interest rates

• asset price declines, banking crises, unanticipated decline in price level

Which one was NOT an agency problem in the subprime mortgage market?

• The evaluators of securities, the credit rating agencies, were subject to conflicts of interest.

• Mortgage originators had little incentives to make sure that the mortgage is a good credit risk.

• Underwriters of mortgage-backed securities had weak incentives to make sure that the holders of the securities would be paid back.

• Homeowners could remortgage their houses with larger loans when their homes appreciated in value.