JP MORGAN CHASE & BEAR STEARNS

JP Morgan Chase & Bear Stearns



JP Morgan Chase & Bear Stearns

Question 1: After reviewing the case and our discussion in class, what events led to the 2008-2010 financial crises? Explain your answer with parenthetical citations?

Answer1- The occurrence of Financial Crisis of 2007-2009 led a major failure of many financial institutions which failed miserably because they had to undergo a bail out with taxpayer money. A major starting point is to conduct an examination of the risk management practices that are implemented in the banks across several countries. In general, there are large numbers of banks that encourages transactions, by giving the appropriate level of liquidity, and gets involved in asset transformation by taking a lot of significant risk onto their books. There are numerous other financial institutions which have a high rate of leverage that also gives a funding for a major share of the operations with debt. There are various situations during different crisis when the funding related to debt financing model keeps the financial institutions mostly vulnerable to various types of market shocks. This is one of the major reason because of which the banks, and numerous types of financial institutions, are given full assurance by the regulators for maintaining a minimum amount of equity capital on their balance sheets. There are well developed regulations that were created to give a safety net in order to decrease the social costs that have a relationship with the negative externalities having association with the bank failures. In addition, there are different types of studies related to the Great Depression which have clearly stated that the banks must look forward towards a balance between their asset risk and financial risk which is best known as leverage. Therefore, these are the events that led to financial crisis in 08-10 (Allen, 2011, 1018).

Question 2: What would a commercial bank's balance sheet have looked like in 1973? What would an investment bank's balance sheet have looked like in 1973? Considering Bear Stearns in 2007, was it closer to a commercial bank or an investment bank? Explain your answer with parenthetical citations?

Answer2- The commercial bank's balance sheet would have looked very different in the year 1973. In the similar way, the balance sheet of the investment bank would have also looked very different in the year 1973. The profile of Bear Stearns is very similar to an investment bank in the year 2007. The description for this phenomenon is explained in the upcoming paragraphs. Banks are made to experience a high level of liquidity risk as it is an integral element of their daily activities. In banking, liquidity refers to the ability in order to meet obligations when short-term liabilities like the deposit withdrawals are made due without the incurring unacceptable losses. Liquidity risk, that is normally included on the liability side, mainly arises because of the unexpected withdrawals carried out by the depositors. Under normal circumstances and with suitable planning, the deposit withdrawals must not create significant ...