1. Explain the difference between a bank having a liquidity problem and a solvency problem. How does each problem affect a bank's balance sheet?
2. The following quote about the ?nancial system is taken from Alessandriand Haldane (2009): "Although diversi?cation may purge idiosyncratic risk, it simultaneously reduces diversity and thereby increases systematic risk". Explain the quote and how it relates to the vulnerability of the ?nancial system to crises. Make sure your answer fully explains the terms in bolded italics in the quote. Please provide a thorough answer.