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Unformatted text preview: to risk or leverage! This is a two edged sword. More assets mean more profit possibility. It also means great risk of insolvency if default rates on loans increase. This is the pivot point of the current financial crisis. In this light carefully examine Figure 12.2 & table 12.4 in the text. 4) Off Balance Sheet Activities a. Loan origination and sale: construct an example b. Letter of Credit c. Line of Credit 5) Bank Risk See table 12.4 in the text a. Liquidity risk: inability to cover day-to-day withdrawls a.i. Reserves are held for this purpose b. Default Risk: Loans become non performing b.i. CDSs can be purchased c. Interest Rate Risk: Lend long and borrow short: collapse of rate spread. c.i. Interest rate swaps c.ii. Other hedging strategies with options d. Trading risk d.i. Banks trade assets from their own account. 6) The too-big-to-fail issue. a. What is the issue of TBTF? b. What are some proposed solutions to TBTF?...
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- Winter '10