Question

*The 2007​ – 2009 Financial Crisis began​ with:

A.

defaults on subprime mortgages.

B.

commercial banks losing their excess reserves.

C.

hedge funds going bankrupt.

D.

a sharp increase in the federal funds rate.

*Proposals for future financial reform​ include:

A.

a general rule to allow financial markets participants to conduct their business in an unconstrained manner

B.

rules to increase excessive risk taking

C.

less regulation for nonbank financial institutions

D.

policies to prevent institutions from becoming​ “too big to​ fail”

*Which of the following gave the Fed the power to set bank reserve​ requirements?

A.

Federal Reserve Act Amendment

B.

​Glass-Steagall Act

C.

President of the United States Franklin Roosevelt

D.

Banking Act of 1933

Answer 1

1. defaults on subprime mortgages is correct - Before the crisis, FED had lowered the interest rates a few times since year 2000. This led to increase in liquidity and money being available at a cheaper cost. Banks started risking more money, giving away more home loans at lesser prices, thus increasing the prices of housing properties. In the process, the banks started to repackage these housing loans for secondary market and sold it to other investors. Trouble started when interest rates started to rise and housing prices reached the peak. The borrowers started defaulting on the loans creating a chain of defaults like few lenders declaring bankruptcy.

2.

*Proposals for future financial reform​ include:

A. a general rule to allow financial markets participants to conduct their business in an unconstrained manner --> False,Financial market participation is always regularised to discourage few participants taking advantage of the markets.

B. rules to increase excessive risk taking -> False, risk taken by banks should be controlled and in accordance with the regulations such as Capital requirement norms

C. less regulation for nonbank financial institutions -> False, Financial institutions are always under regulations as they deal with public money and investors/public interest needs to be protected.

D. policies to prevent institutions from becoming​ “too big to​ fail” -> True. Few big banks (Rg. Lehman brothers which failed during the crisis could have been prevented by more stringent policies. After the crisis, many rules and regualtions have been such as BASEL norms to prevent banks from failing.

3 Which of the following gave the Fed the power to set bank reserve​ requirements?

A. Federal Reserve Act Amendment - True, this act provide authority the board to impose reserve requirements.

B. ​Glass-Steagall Act - False (Investment bank vs retail bank separation)

C. President of the United States Franklin Roosevelt (Flase)

D. Banking Act of 1933 - False