Explanation:
This choice states that all companies, financial intermediaries, and non-financial companies are still willing to lend to the intermediary. However, this is not accurate. In the context of a financial crisis, firms, financial intermediaries, and non-financial companies would typically be very reluctant to lend to an intermediary that is facing solvency issues. This reluctance is often reflected in high credit spreads and a decrease in the volume of loan proceeds that the affected company can acquire. Therefore, this choice does not accurately describe a step in the sequence of events leading to the collapse of a financial intermediary during a financial crisis.
Choice A is incorrect. This statement accurately represents a step in the sequence leading to the collapse of a financial intermediary. During a financial crisis, reports of losses at an institution can indeed raise concerns about its solvency, which can trigger further negative events.
Choice C is incorrect. This statement accurately represents a step in the sequence leading to the collapse of a financial intermediary. When faced with liquidity issues and unable to secure loans from other institutions, an intermediary may be forced into liquidating assets at potentially unfavorable prices.
Choice D is incorrect. This statement also accurately represents part of this sequence; lenders often become more reluctant to extend credit as they realize that their risks are increasing due to mark-to-market losses at the borrowing institution.
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Q.2982 In the period of the global financial turmoil, the collapse of the financial institutions can largely be attributed to both illiquidity and insolvency. Which of the following does NOT describe the sequence of events in the collapse of an intermediary?
A
Issues about the solvency of the company were raised by the reports of losses at the intermediary, or at other institutions.
B
All companies, financial intermediaries, and non-financial companies are still willing to lend to the intermediary.
C
To raise funds, the intermediary is forced to liquidate assets, which might lead to losses in a distressed market.
D
Being aware that the challenges faced by the intermediary are now being compounded by the realized mark-to-market losses, the lenders become more and more reluctant to extend credit to the intermediary.