QUESTION 1 - BANKING CRISES (maximum 800 words) - [25 points]

1. Discuss the recent banking crisis in the US (SVB, First Signature and First Republic and related events). Address the following issues:

1. Solvency versus liquidity - which was the problem (illustrate with a diagram on balance sheet) - [5 points]
2. Origin of the crisis [3 points]
3. Contagion - (i) how did it happen and what made it worse, (ii) when is bail-out of depositors justified (discuss critically)? [6 points]
4. Prudential tools [4 points]
5. Crisis management tools and the role of different agencies [7 points]

QUESTION 2- CENTRAL BANKING (maximum 800 words) - [35 points]

Discuss trade-offs between price stability and financial stability when tightening monetary policy. Choose either the ECB, the Bank of England, or the Federal Reserve to illustrate the case with relevant data for the recent tightening cycle.

In answering the question:

1. Explain the transmission mechanism for QT and short-term interest rate increase and report relevant numbers for the case of your choice in recent tightening cycle.
2. Give a view on trade-offs for both instruments and evaluate those risks for the case of your choice in recent tightening cycle.
3. Explain how the two objectives must be balanced.