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Credit Metrics, Syndicated Loans, Graham Leach Bliley Act, KMV Model

1. One implication from Credit Metrics is that bank regulatory minimum risk based capital standard are very conservative. What is the economic rationale for this view point?

2. What is a syndicated loan? Illustrate its basic structure by a diagram/graph. Give a brief description of the two types of underwriting that are used in syndicated lending. In the secondary market for syndicated loans, what is the key difference between assignment and participation? What has been the pattern of bank and non bank participation in the primary market for syndicated loans between 1994 and 2004?

3. Provide a brief discussion of the Graham Leach Bliley Act. Discuss the difference between a BHC and a FHC. Also, describe the requirements to be a FHC. What is the Glass-Steagall Act and how did Graham Leach Bliley Act impact it?

4. Briefly describe the KMV model (Merton Option Model) and illustrate it by a graph. Describe in the answer what the standard deviation represents and discuss the probability of default. If asset growth was always positive and above the debt level, and the standard deviation was zero, what would this imply about the probability of default?

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The implications from credit metrics for a bank regulatory minimum risks based capital standards conservatives are determined. The key differences between assignment and participation are given.