Practice question · Multiple choice
Subprime defaults were a small share of the mortgage market, yet the losses threatened the global banking system. What amplified them?
Hints
- Ask what a 3% loss does to an institution holding 3% capital.
- Then ask what its failure does to whoever it owed.
Show the answer
A. Leverage and interconnection through the counterparty chain
Why
Leverage converts a small loss into insolvency, and interconnection turns one insolvency into many. The trigger was modest; the transmission mechanism was not.
Practise The Global Financial Crisis
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More questions on The Global Financial Crisis
- The 2008 crisis began in a market, US subprime mortgages, far too small to bankrupt the world. How did it…
- Why did the GFC not become a second Great Depression?
- Post-crisis regulation raised bank capital requirements substantially. Why does that not make another…
- Securitisation made the financial system safer by spreading risk more widely.
- Sort each factor: did it cause the crisis or respond to it?
- Match each GFC concept to its meaning.