1. Bank panics
a. What role does asymmetric information play in causing a bank panic?
b. How do liquidity and solvency problems interact during a banking crisis? (Address both how liquidity problems create solvency problems and why insolvency fears cause widespread liquidity problems).
2. The financial crisis:
a. Describe the process of ‘secularization’ in your own words. How was securitization designed to spread final default risk (from the perspective of investors)? What assumption about the underlying mortgage risks must hold for mortgage backed securities to spread risk?
b. What is the difference between the “originate and hold “model, and the“originate and distribute (or sell)” model?