Over the past 35 years, the banking system in the U.S. has undergone remarkable cycles of prosperity then adversity, culminating in the financial crisis of 2008-09. In the aftermath of this crisis, banks still face their three fundamental challenges – the “nightmares” of disintermediation, interest rate risk, and loan default. But two of them are considered to be under at least reasonable control due to changes in economic situations, financial innovations, or legislation. At least one of them, though, emerged as a serious problem in the financial crisis of 2008-09. This occurred especially due to misuse of financial innovations originally designed to help banks.
1. For each of the two “nightmares” under control, name two examples of economic situations, innovations, or legislation since 1980 that have helped them achieve this favorable status. Then identify the nightmare that has emerged as the serious problem. Provide a specific financial innovation from the post-1980 era and explain how was misused in this regard. Provide a way to reduce the incidence or impact of this current problem, either through the banks themselves or through regulatory assistance.
2. Address a fundamental role of the FDIC within this financial crisis. Describe two measures that were taken by the FDIC, Federal Reserve, or federal government to address this crisis as it was occurring.
3. Citing a specific example, explain how a non-bank financial intermediary was victimized by the financial crisis of 2008-09.