Global Financial Systems Stability And Risk 1st Edition Jon Danielsson - Solutions

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Many commentators talk of contagion when it comes to sovereign debt crises. Identify how this could happen.
Does a country suffer more when it experiences a currency crisis or when it experiences a banking crisis or a sovereign debt crisis?
Would the euro zone be better off if Greece left?
Would Greece be better off if it left the euro zone?
What is the cause of the European sovereign debt crisis?
What are main conditions for a successful monetary union, and did the euro zone fulfil those criteria?
What is the main reason why the euro zone was established?
The role of entities buying sovereign bonds on the secondary market at a big discount is controversial, especially the so-called ‘vulture funds’. Do you agree with their methods and, more generally, what is your view on the enforcement mechanisms that should exist for sovereign debt?
Do you think a return to gunboat diplomacy would be useful in dealing with sovereign debt crises?
Yields on government bonds of the US are currently trading at record lows. How can this be reconciled with the fact that the US is approaching its greatest level of debt to GDP in its history, apart from in wartime?
How can a government default on its debt without actually declaring default?
Is it too strong to say Britain liquidated Newfoundland?
Do you think that the problem of too big to fail is being adequately addressed?
What are the main legal problems in resolution?
What is the maximisation harmonisation principle, and do you think it should be used to set European capital levels?
Does the NSFR positively or negatively affect the problem of maturity mismatches?
Do you expect the LCR to be effective?
Which do you prefer, the risk-weighted Basel CAR or the leverage ratio?
What are the main changes to capital in Basel III?
What is the problem the European banking union is meant to solve and what is the main reason why it may not happen?
Compare contrast the systematic risk institutions in the US, UK and EU.
How has the role of the supervisor changed in the crisis?
How has the role of the treasury changed in the crisis?
How has the role of the central banks changed in the crisis?
Was the crisis response of the authorities appropriate?
Many commentators maintain the failure to bail Lehman out was the main factor in the crisis becoming so severe. Today, European authorities use the example of Lehman as a justification for supporting European banks. Do you agree?
Was it correct to bail AIG out?
What were the main symptoms of the crisis when it reached its peak?
7?
What were the initial signs of the crisis in the summer of
How has banking changed over the past decades and how did that make banks more vulnerable?
What was the role of complex assets and marking to market/model/magic in the crisis?
What is the role of ‘accelerators’ in crisis?
7–2009 crisis in the context of that.
Describe a typical crisis/bubble and analyse the
Identify the main economic factors leading to the crisis.
What you think about the assumption in the Basel accords and EU laws that sovereigns are risk free?
7?
Did the hybrid capital instruments work effectively in the early stages of the crisis from
What is the problem of toxic assets in bank capital?
How did financial engineering undermine the integrity of bank capital?
Does the focus of prudential regulations potentially increase systemic risk?
It is sometimes said that the outcome of active risk management is to lower volatility and fatten the tails. What does this mean, and do you agree?
7?
Was excessive deregulation and liberalisation of financial markets a key contributor to the crisis from
defaults.(b) Suppose you package the securities into a collateralised debt obligation (CDO).How big would you make the AAA tranche?
and
,
,
%.(a) Calculate the probability and cumulative probability of
% and a BB bond
% probability of default, an A bond
% default probability, where the defaults are independent across securities.Suppose an AAA bond has a
million dollars. Each of these securities has a
We have three subprime mortgage backed securities, S1, S2, S3, each with a par value of
7 it was often blamed on US structured credit products that crossed the Atlantic and adversely affected some European banks. What were those products, and why were some banks so badly affected?
When the crisis started in
What is your view on CDO2 and CDO3?
Spreads on AAA bonds have traditionally narrowed in times of financial uncertainty, and when the economy is in a deep recession yield on AAA tend to be very close to yields on government bonds. Has this been the case for AAA rated tranches of structured credit products?
Some commentators have said that CDOs, especially those containing subprime assets, are the equivalent of catastrophe insurance, in particular, the highest rated tranches.Identify the arguments in favour of the statement.
What is the role of correlations in the creation of CDOs?
How can we use CDOs to turn high-risk assets into safe assets?
What are naked CDSs?
The EU has effectively prohibited CDSs on European sovereign debt. It argues that the CDS market contributes to the crisis. Do you agree?
Do you think CDSs should be banned or heavily restricted?
There are some proposals for using structured credit products to solve the EU sovereign debt problem. What sort of product could they be, why are they proposed, and would they work?
Is the rapid growth of derivatives over the past few decades a cause for concern?
Who are the main beneficiaries from the complexity of financial products, and who are the losers?
than they would have been without any explicit or implicit guarantees.
makes losses worse if things turn out to be bad in t =
bid up the price to the Pangloss value. Now the government announces that it will bail out investors only once and will then withdraw all guarantees. Show that this leads to a situation of multiple equilibria.(c) Prove that the government guarantee at t =
. What is the value of the return that investors can expect? What is the Pangloss value?(b) The government explicitly guarantees all investments, so that investors at t =
p
.5
y and
. With probability p the returns will be y, otherwise the returns will be x. The following holds: x
and t =
and returns in periods t =
How can the concept of Pangloss value be used to explain the behaviour of investors?Is it rational?(a) Consider a two-period model with an initial investment at t =
What is a Pangloss value?
What is your view on the ECB liquidity programmes?
If a central bank provides liquidity assistance to banks, what should the time span for the assistance be?
What are the main arguments for keeping bailouts secret and the main arguments for making them public?
How can we justify using taxpayers’ money to bail out those who own and run banks, especially when the bank owners and managers represent one of the richest segments of the population, who then receive a transfer from their poorer countrymen?
Should the bailout be based on banks’ size or interconnectedness? Offer one example for each form of bailout.
How could the problem of moral hazard associated with bailouts be reduced?
Does the existence of LOLR encourage excessive risk taking?
Should the central bank charge a penalty rate when doing LOLR?
Why does the central bank and not the treasury do liquidity injections and LOLR?
Why should the treasury and not the central bank do a direct bailout?
What are the main ways a government can do a direct bailout? Which way is preferred by taxpayers and which by the banks?
Why did the Irish bailout of the banks end up causing the bailout of the Irish government itself?
Comment on the relationship between the size and credibility of a bailout package to its effectiveness.
%. Is the bank meeting its CAR requirement?(e) Comment on the last answer from the point of view of the impact of leverage on the bank’s capital structure.
% and as a consequence the market value of all bonds drops by
, with the rest in the government bond. Suppose the markets fear inflation and interest rise by
, $300 to the AA bond, with rest to the government bond. Is the bank meeting its CAR requirement?(d) The bank invests $800 in a AA rated bond that attracts a risk weight of
, with the rest in the government bond. Is the bank meeting its CAR requirement?(c) If the bank instead allocates $500 to a BB rated bond with a risk weight of
% minimum CAR requirement(a) Suppose the bank raises $900 in deposits and invests all of its cash on hand in risk free government bonds. What will its CAR be?(b) Suppose instead the bank invests $800 in a AA rated bond that attracts a risk weight of

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Global Financial Systems Stability And Risk 1st Edition Jon Danielsson - Solutions

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