Problem1. USA and Europe are currently undergoing major chaos in their financial sectors. Several banks are writing off huge amounts of debts as losses, whilst others are looking for fresh capital or additional liquidity to survive. AIG, Lehman Brothers and Citi are the main ones who have been affected recently and others are following the trend slowly. USA is most presumably in a recession; UK and Germany are starting to show signs of slowdown.
(i) Do you think that financial development or financial chaos has an impact on economic growth?
(ii) Taking an example of a recent case of bankruptcy in financial sector in the USA or UK, explain clearly the causes which could have led to the closing down or recapitalization of that financial institution.
Problem2. Liquidity is as much significant for a bank as profitability and risk management especially throughout economic slowdown.
(i) Explain the terms:
(a) Liquidity risk
(b) Liquidity Gaps
(ii) Assess the benefits of cash matching.
(iii) Describe why liquidity is of so much significance especially throughout economic slowdown.
Problem3. Almost all investment banks in USA are currently being closely monitored. Several investment banks have closed down. Most investment banks have been in underwriting and securitization business. At the same time, commercial banks are taking stringent measures to minimize credit risk.
(i) Taking an example of a real case, explain how credit risk can migrate into others banking risks.
(ii) After explaining how Securitization operates, critically consider the costs and benefits of Securitization.