Money and Financial Institutions - Bank panics & The financial crisis

Money and Financial Institutions Assignment #6

You can type your answers or write them by hand and scan them using the camera on your phone/tablet. In either case, submit the file as a single pdf document. If you type your answers, it is important to save as a pdf before submitting – equations often get jumbled between computers.

1. Bank panics

a. What role does asymmetric information play in causing a bank panic?

b. How do liquidity and solvency problems interact during a banking crisis? (Address both how liquidity problems create solvency problems, and why insolvency fears cause widespread liquidity problems).

2. The financial crisis:

a. Describe the process of ‘securitization’ in your own words. How was securitization designed to spread final default risk (from the perspective of investors)? What assumption about the underlying mortgage risks must hold for mortgage backed securities to spread risk?

b. What is the difference between the “originate and hold” model, and the “originate and distribute (or sell)” model?