Omit 9. Arnold Kling, “Not What They Had In Mind”


09. In Juliusz Jablecki and Mateusz Machaj’s article “The Regulated Meltdown of 2008”:


a. In the section “Playing by the Basel Rules” explain how a bank can expand its balance sheet by getting mortgages off its balance sheet and rebuying them as ABS (Asset Backed Securities).


b. In the next section explain how the Basel rules encouraged banks to relax their credit standards and create subprime mortgages. (Hint: Explain briefly how an ABS can be divided into tranches.)


c. In the section on Shadow Banking explain why subprime risk was concentrated in the leveraged sector of American banks (Hint: Explain what the shadow banking system is.)


d. In that same section, explain how maturity mismatching was transferred from a bank’s balance sheet to its SIV.


e. In the section “Run on the Shadow Banking System” explain why the collapse of the housing market (housing prices start to fall resulting in a rise in defaults) caused a run on the shadow banking system. 


10. In Mark Perry’s article “Due North: Canada’s Marvelous Mortgage and Banking System”:


a. What are full recourse loans and what effect does that have on borrowers’ behavior? (Compare US to Canada.)


b. What advantages do shorter fixed term mortgages have for Canadian lenders?


c. Perry notes that Canada’s banking system is pro-lender while the US banking system is pro-borrower, indicating that the former is safer and more stable than the latter. Explain using his points #4, #5, #7 and #8.