FIN320 Final Study Guide ：Help me complete the study guide with each questions

Financial Crises and Financial Regula0on

Professor Lamont Black FIN320 Week 7

How Do You Spot a Bubble?

•  Housing bubble leading up the crisis •  Bitcoin? Pot stocks?

•  Equity bubble today?

•  What is the role of low interest rates?

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Origins of Financial Crises

•  Financial crisis: significant disrup0on in flow of funds from lenders to borrowers

•  Most financial crises involve a banking crisis

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Underlying Fragility of Commercial Banking

•  Banks accept short-term deposits to make long- term loans

•  This creates maturity mismatch and liquidity risk

•  Insolvent bank: value of assets < value of liabili0es

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Bank Runs, Contagion, and Bank Panics

•  Bank run: simultaneous withdrawals by a bank’s depositors

•  Leads to fire sale of assets

•  Contagion: bad news about one bank affec0ng other banks

•  Bank Panic: mul0ple bank runs

•  Banks are opaque

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Government Interven0on to Stop Bank Panics

•  Between 1836 and 1914, no central bank •  Prior to 1933, no deposit insurance

•  Two approaches to prevent bank panics:

•  Lender of last resort: Federal Reserve discount window in 1913

•  Deposit insurance: Federal Deposit Insurance Corpora0on in 1934

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Bank Panics and Recessions

•  From 1857 to 1933, every bank panic was associated with a recession (apart from two in the Civil War)

•  Banks in distress lead to economic contrac0on

•  Credit crunch: banks less willing to make loans

•  Nega0ve feedback loop – a recession hurts banks

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Bank Panics and Recessions

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Date of the bank panic Did the bank panic occur during a recession?

August 1857 Yes

December 1861 No

April 1864 No

September 1873 Yes

June 1884 Yes

November 1890 Yes

May 1893 Yes

October 1896 Yes

October 1907 Yes

October 1930 Yes

April 1931 Yes

September–October 1931 Yes

January–February 1933 Yes

Nega0ve Feedback Loop

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Exchange-Rate Crises

•  Exchange-rate crises typically occur when a country is suppor0ng its currency but runs out of foreign reserves (a peg)

•  Difficulty in accessing global capital markets (capital controls)

•  Asian financial crisis in late 1990s

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Sovereign Debt Crises

•  Sovereign debt is bonds issued by governments

•  A crisis occurs when a country has difficulty making payments

•  Budget deficits -> recession

•  Europe from 2010-2013

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The Financial Crisis of the Great Recession

•  The Great Depression of the 1930s

•  Real GDP declined by 27% from 1929 to 1933 •  Real investment fell by 81%!

•  It began before the crash of October 1929

•  Tariffs and immigra0on…

•  Tight monetary policy…

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Depression Stock Market

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Depression Economy

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Financial Crisis of 2007-2009

•  Housing bubble bursts

•  Bear Stearns, Lehman Bros., AIG

•  The Federal Government Response

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Financial Crises and Financial Regula0on

•  Was de-regula0on partly to blame? •  “Too Big to Fail”

•  Was the post-crisis re-regula0on too much?

•  Dodd-Frank Act of 2010

•  Compliance costs 16

Basic Capital Regula0on

•  CAMELS Ra0ngs

Capital adequacy Asset quality Management Earnings Liquidity Sensi0vity to market risk

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Capital Adequacy

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Category DescripEon Tier 1 capital raEo Total capital raEo

1 Well capitalized 8% or greater 10% or greater

2 Adequately capitalized 6% or greater 8% or greater

3 Undercapitalized Less than 6% Less than 8%

4 Significantly undercapitalized Less than 4% Less than 6%

5 Cri0cally undercapitalized Less than 2% —

Capitaliza0on

•  Would “more capital” prevent future crises?

•  What would be the cost?

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