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P2.T9.601. Case Studies on Disruption During the Crisis (Yorulmazer)

Nicole Seaman

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Learning objectives: Understand the use and purpose of funding mechanisms and describe the distress in the markets during the recent credit crisis. Distinguish between Commercial Paper and Asset-Backed Commercial Paper and describe the policy responses to recent market collapses. Compare and contrast sources of disruption in the money market mutual funds, repo markets, and credit commitments. Evaluate the implications of the dollar funding model of non-U.S. banks during the recent crisis.

Questions:

601.1. Among the following four types of commercial paper, which market suffered the greatest DECLINE during the Global Financial Crisis--in particular the second half of 2007--and generally regressed the MOST (ie, experienced the lowest growth rate) since the crisis?

a. Unsecured corporate commercial paper (CP)
b. Unsecured financial commercial paper (CP)
c. Asset-backed commercial paper (ABCP)
d. Unsecured asset-backed commercial paper (UABCP)


601.2. For various financial markets, Yorulmazer's case studies discuss the following: the size and evolution of the market; the sources of fragility during and after the Global Financial Crisis (GFC) of 2007-90; and the policy responses aimed at mitigating distress and restoring market liquidity. With respect to (i) the money market fund (MMF), (ii) the repo market, and (iii) credit commitment markets, each of the following statements is true EXCEPT which is false?

a. Money market funds (MMFs) represent the safest asset class because they are fully insured by the FDIC and there has never been a "break[ing of] the buck;" i.e., no MMF share price has ever traded below the regulated one dollar ($1.00)
b. Because money market funds (MMF) meet redemptions by disposing of their highly liquid assets (rather than selling a cross-section) redeeming investors during a market strain pose a negative externality on non-redeeming investors
c. A dramatic increase in collateral haircuts from early 2007 to late 2008 (e.g., for some assets, from zero to 50%) greatly disrupted repo markets which contributed to the failure (or near-failure) of major financial institutions during the GFC
d. In late 2008, the FDIC deposit insurance limit was increased from $100,000 to $250,000 which appears to have helped stabilize the exodus of deposits from banks and which, in turn, helped make the extension of bank lines of credit (LOC) and loan commitments less fragile


601.3. Which of the following statements most accurately summarizes the nature and implications of the dollar funding model of non-U.S. banks during the recent crisis?

a. Non-U.S. banks did not (and generally do not currently) hold sizable U.S. dollar-denominated assets because banks that are not headquartered in the U.S. cannot insure their deposits via FDIC insurance
b. Non-U.S. banks held (and still do hold) sizable U.S. dollar-denominated assets which were fragile during the GFC due to their dependence on wholesale funding, and since the crisis, central banks (eg, ECB, Bank of Japan) have facilitated access to dollars
c. Non-U.S. banks held (and still do hold) sizable U.S. dollar-denominated assets, but on average they also held substantial dollar liabilities on the other side of their balance sheet such that the system-wide funding risk associated with gross positions was minimum ("de minimus"), and central bank facilitation has not been required
d. Non-U.S. banks held (and still do hold) sizeable U.S. dollar-denominated assets which were fragile during the GFC due to their dependence on wholesale funding, but central banks facilitation has not been required because money market funds (MMFs), in their role as relatively risk-insensitive wholesale investors, have stepped in with growing demand for such dollars especially during crises; eg, European debt crisis

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