Financial Crisis Quiz

Which of the following is correct?

• Funding liquidity risk is typically measured via bid-ask spreads.

• An asset's liquidity risk is related to how quickly and cheaply one can sell the asset.

• Both of the above are correct.

• None of the above is correct.

Which of the following is correct?

• Banks do maturity transformation by investing funds raised through share issues into long term assets.

• Banks do maturity transformation by investing funds raised through securitizations into deposits.

• Banks make money by setting interest rates on deposits that are a bit higher than interest on the mortgage loans.

• None of the above is correct.

Which of the following is correct?

• Short memory bias may result from the application of statistical models that give less weight to.

• Hyperbolic discounting is caused by small bonuses.

• Bonuses drive executive behaviour and can create perverse incentives leading everyone to try and make money now, forgetting about the future implications of the risk they are taking today.

• All of the above

During the subprime crisis, banks in trouble managed to survive mainly through:

• New share issues

• Higher inflow of deposits

• Substantial asset sales at good prices

• Government Support

Which of the following is incorrect?

• Credit risk includes default risk and recovery risk

• Counterparty risk includes default risk and recovery risk

• Securities are either subject to credit risk or market risk

• Market risk includes currency risk and commodity risk

Which of the following is correct?

• JP Morgan took over Bear Sterns in 2008

• Northern Rock was the largest default in US history

• Lehman Brothers was instrumental in saving other banks during the subprime crisis

• Goldman Sachs became an investment bank to be able to access the government’s safety net

During the subprime crisis:

• Mortgage defaults caused banks to restrict lending. Less lending reduced the risk in the system and as a result also sovereign risk went down.

• Sovereign risk is not directly linked to retail and corporate default risk

• Both of the above

• None of the above

Often financial crises happen because:

• Low interest rates create incentives for excessive lending

• Underwriting standards deteriorate

• Overconfidence

• All of the above

Which of the following is correct?

• Pass-through securitisations can produce AAA securities through tranching

• With tranching, losses from the original pool of assets are used to decrease the value of the lowest rates tranches first.

• With tranching, gains from the original pool of assets are distributed starting from the lowest rated tranch.

• All of the above.

Can securitization help banks reduce their financial risk?