Deregulation refers to the rules placed on banks to reduce the risks involved in lending.

Low interest rates in many western economies in the early part of the 2000s encouraged speculative borrowing to purchase higher risk assets.

Global deregulation makes it harder for financial institutions to move capital to different financial centres around the world.

Positive equity refers to the difference between the value of an asset such as a house and the amount borrowed to finance its purchase.

The changing financial climate in the noughties led to banks and mortgage lenders tightening up the rules on loan to value ratios for prospective mortgage borrowers.

The sub-prime market refers to lending to individuals with strong credit ratings who are classed as low-risk.

The purchase of an asset because of the belief that its price will rise in the future is a characteristic of an asset price bubble.

A bank re-sets its reserve ratio at 10 per cent from 7 per cent. This will mean that it is able to increase lending by creating more credit.

Securitization of assets became more popular because it enabled banks to generate additional reserve assets on its books and thus allowed them to expand lending.

A widening of asymmetric information in financial markets is more likely to increase the likelihood of moral hazard.

A Pareto improvement refers to a situation where resources can be reallocated which make a specifically identified group better off than another group and where the value of the benefits to the group is greater than the value of the sacrifice made by the losers.

A credit rating of CCC represents a less risky asset than one rated at A.

A ‘first-loss’ position is where the originator of a loan agrees to underwrite the full value of the loan to the first claimant in the event of the loan defaulting.

A special purpose vehicle allows banks to be able to place assets off-balance sheet and thus facilitate increased lending.

The process of splitting assets on a bank’s balance sheet to allocate reserves is called tranching.

Credit default swaps allow investors to hedge against the possible default of a bundle of assets by transferring the risk to an insurer.

A credit event could be triggered by a rise in the number of firms becoming insolvent.

A cut in the rating of a bond would lead to the yield of the bond also falling.

The term ‘recession’ refers to an annual fall in the value of economic output in a country.

The credit crunch occurred because Libor fell to low to make it worthwhile for banks to lend to each other.

Deregulation eroded the monopoly of mortgage lenders in the UK because:

During a severe downturn in the economy, a central bank would be most likely to:

An increase in real house prices in a country is most likely to:

The targeting of the sub-prime market for loans caused:

The loan-to-value ratio refers to:

In the US the Fed maintained low interest rates for much of the noughties. This was because it:

Teaser rates are:

A central bank interest rate below inflation means:

The securitization of assets relies on:

Asymmetric information refers to: