We are approaching the end of the course and you should now have a better idea about the roles financial institutions (FIs) play in the economy, the risks they face, and available tools they can use to mitigate such risks. We have also discussed about a number of major events throughout the history when risks were not properly identified, measured, and managed, which led to a number of crises, with ‘the global financial crisis during 2008-09’ being one of the most disruptive and long-lasting crises in our recent past. The financial crisis demonstrated how vital the financial system is to both our local and global economy, and immense negative externalities the system can create should it fails.
- What were the impacts from interest rates, and hence the FI’s net interest income?
- Were there any changes in your FI’s portfolio of assets and liabilities (duration, liquid assets, level of capital, etc.)?
- What do you observe on the default risk before, during, and after the financial crisis? FI managers as well as investors usually monitor CDS indices (most commonly 5-year CDS) as indicators of credit risk.
Note that CDS also reflects the credit risk perceived by the market as opposed to credit rating agencies. Consider the following country pairs:
(1) Japan and Canada
(2) Malaysia and Chile
(3) China and Qatar What can you imply from these examples?
- What happened to liquidity risk, right before, during, and after the financial crisis. What were the impacts on your FI? How did it react to such impacts?
- FI managers as well as investors usually monitor volatility indices as indicators for market risk, with the VIX Index (CBOE Volatility Index (VIX)) being most widely used. Describe the movements of the index before, during, and after the crisis. Did your FI suffer from and how did it react to market risk?
- Did the financial crisis cause any interruption in the derivatives market? Were there any changes in investors’ preferences towards derivatives and ‘plain vanilla’ products? Were there any changes in your FI’s business model post-crisis?
- Were your FI involved in Mortgage-Backed Securities (MBSes) and Collateralized Debt Obligations (CDOs)? Were there any changes in your FI’s policies regarding loan sales and securitization post-crisis?
- Briefly summarize the major impacts the financial crisis had on your FI. How did your FI respond to the shocks?
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