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  1. Glass-Steagall Act of 1933
    eliminated the last barriers between commercial and investment banks, allowiing commercial banks to enter areas of more risk
  2. Community Reinvestment Act by Congress
    banks forced to make loans in bad neighborhoods

    • guidelines rewrote prudent lending rules
    • -lack of credit history is not a disqualification
    • -welfare payments accepted as source of income
    • -temporary unemployment benefits accepted as income
    • -instructed to be flexible on employment criteria
  3. Mortgage loans in US categoriezed
    • prime (A-Paper)
    • Alt-A (alternative paper)
    • Sub prime
  4. sub prime
    • reflects borrowers who do not meet underwriting criteria and have a higher perceived risk of default normally as a result of credit history
    • typrically pay 2% premium over prime - subprime differential
  5. securitization
    the process of turning an illiquid asset into a liquid saleable asset
  6. liquid asset
    one that can be exchanged for cash instantly at fair market value
  7. securitization (2)
    • bypasses the traditional financial intermediaries to go direct to investors in the marketplace to raise funds
    • two forms: mortage-backed securities (MBSs) and asset-backed securities (ABSs)
  8. ABSs
    include second mortgages and home-equity loans based on mortgages, credit card receivables, auto loans
  9. Collateralized debt obligation (CDO)
    sold to market in categories representing the credit quality of the borrowers in the mortgages
  10. sophisticated risk management models
    • scenario analysis
    • stress testing of portfolios
    • 'what it' analysis
  11. Credit default swap (CDS)
    • a contract, a derivative, which derived its value from the credit quality and performance of any specified asset
    • in short: bet whether a specific mortgage or security would fail to pay on time or at all
    • designed to shift the risk of default to a third-party
    • provide insurnace against the possibility of borrower not paying
  12. credit enhancement
    the method of making ivnestment more attractive to prospective buyers by reducing their perceived risk
Card Set
Credit Crisis
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