Interest rate rise: Cheap credit became too big a risk

(1) the increased size of financial institutions as a result of financial consolidation increases the too-big-to-fail problem, because there will now be more large institutions whose failure would expose the financial system to systemic (systemwide) risk: thus more financial institutions are likely to be treated as too big to fail, and the increased moral hazard incentives for these large institutions to take on greater risk can then increase the fragility of the financial system;

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Medically speaking, low interest. its own cause. Cheap and abundant credit has played an integral part in boosting domestic U.S. oil and gas production, and therefore in reducing oil and gas prices.

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In year seven, we pretend the index increased by another .50%, raising your mortgage rate to 4%. In year eight, a big jump in the index increases your rate another two percentage points to 6%. This is where ARMs can get scary in a hurry, and why most homeowners prefer fixed rates.

Smaller banks, on the other hand, exhibit a big spike in interest rate risk. Risk did not rise visibly during the crisis, but after 2009 it started a very steep ascent (figure 2). One of the more troubling aspects of this spike is the fact that it is coming from both assets and liabilities (figures 3 and 4).

The credit crunch, which began on September 14 of that year with a run on Northern Rock, led to a succession of interest rate cuts that redefined our economy. The largest was by 1.5 points on.

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Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments. Non-investment-grade debt securities (high-yield/junk bonds) may be subject to greater market fluctuations, risk of default or loss of income and principal than higher-rated securities.

16) Because of an expected rise in interest rates in the future, a banker will likely A) make long-term rather than short-term loans. B) buy short-term rather than long-term bonds. C) buy long-term rather than short-term bonds. D) make either short or long-term loans; expectations of future interest rates are irrelevant.

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