QUESTION 1 It is unusual for private credit booms to be associated with financia

Question

QUESTION 1 It is unusual for private credit booms to be associated with financial crises. QUESTION 2 Securitization is the process of transforming bank liabilities into bank assets. QUESTION 3 A financial institution is permitted to use leverage u to a maximum debt equity ratio of 20. Currently the bank finances its $100 of assets with $4.5 of equity and $95.5 of debt. If asset values fall to $91 the bank will have a capital shortage of $5.5 QUESTION 4 The most recent credit boom the United States was a dramatic increase in households issuing debt to purchase real estate. The mistake that banks made was that they did not secure their landing with the purchased real estate. QUESTION 5 Mortgage debt per capita in the USA declined between 1980 and 2006. This is because households were using credit cards to borrow and credit card debt is unsecured.

Explanation / Answer

Historical financial crises shows that most of the crises are causes by credit booms to subprime borrowers or infusion of a lot of money in the market for easy credit. The defaults in these credits creates liquidity problem and then it gets worsen to financial crisis.

2.False.

It is a process of creating liquid assets from other assets so that more lending can be done and more money can be created.

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