Learning objectives: Apply the concept of “too big to fail” to the use of clearinghouses. Evaluate the shortcomings of clearinghouses in reducing risk.
Questions:
501.1. Which argument most nearly (best) summarizes Mark Roe's argument in Clearinghouse Overconfidence with respect to a central clearinghouse (CCP) and the concept of too-big-too-fail (TBTF)?
a. CCP is a too-big-to-fail (TBTF) institution but it WILL reduce systemic risk per the risk reduction principle
b. CCP is a too-big-to-fail (TBTF) institution and it will NOT reduce systemic risk per the risk transfer principle
c. CCP is NOT a too-big-to-fail (TBTF) institution and therefore it WILL reduce systemic risk per the risk dissipation principle
d. CCP is NOT a too-big-to-fail (TBTF) institution but it WILL INCREASE systemic risk per the risk aggregation principle
501.2. According to Roe, a central clearinghouse (CCP) is most likely to successfully reduce systemic risk under which of the following adverse scenarios?
a. CCP reduces systemic risk when confronted with information contagion
b. CCP reduces systemic risk during economy-wide asset sell-off
c. CCP reduces systemic risk by averting the failure of a systemically important financial institution (SIFI)
d. CCP reduces systemic risk by alleviating the cash pressure on a single clearinghouse member without raising liquidity pressure elsewhere
501.3. According to Roe, each of the following is a shortcoming of the central clearinghouse in reducing risk EXCEPT which is not?
a. CCP can setoff debt with falied member more quickly (i.e., potential for speed) than ordinary debt collection
b. Eliminating risk between two parties (counterparty risk) does not eliminate systemic risk if the risk is merely transferred to a third party
c. Better collateral for the clearinghouse reduces collateral available to others in the financial system
d. Under a scenario like the 2008-09 global financial crisis, the CCP could deepen the downward asset price spiral
Answers here:
Questions:
501.1. Which argument most nearly (best) summarizes Mark Roe's argument in Clearinghouse Overconfidence with respect to a central clearinghouse (CCP) and the concept of too-big-too-fail (TBTF)?
a. CCP is a too-big-to-fail (TBTF) institution but it WILL reduce systemic risk per the risk reduction principle
b. CCP is a too-big-to-fail (TBTF) institution and it will NOT reduce systemic risk per the risk transfer principle
c. CCP is NOT a too-big-to-fail (TBTF) institution and therefore it WILL reduce systemic risk per the risk dissipation principle
d. CCP is NOT a too-big-to-fail (TBTF) institution but it WILL INCREASE systemic risk per the risk aggregation principle
501.2. According to Roe, a central clearinghouse (CCP) is most likely to successfully reduce systemic risk under which of the following adverse scenarios?
a. CCP reduces systemic risk when confronted with information contagion
b. CCP reduces systemic risk during economy-wide asset sell-off
c. CCP reduces systemic risk by averting the failure of a systemically important financial institution (SIFI)
d. CCP reduces systemic risk by alleviating the cash pressure on a single clearinghouse member without raising liquidity pressure elsewhere
501.3. According to Roe, each of the following is a shortcoming of the central clearinghouse in reducing risk EXCEPT which is not?
a. CCP can setoff debt with falied member more quickly (i.e., potential for speed) than ordinary debt collection
b. Eliminating risk between two parties (counterparty risk) does not eliminate systemic risk if the risk is merely transferred to a third party
c. Better collateral for the clearinghouse reduces collateral available to others in the financial system
d. Under a scenario like the 2008-09 global financial crisis, the CCP could deepen the downward asset price spiral
Answers here:
