This coursework is a requisite for the course BANK Management. The main objective of this coursework is to describe The implications of the global financial crisis of 2007 – 2009 for the management of banks. In order to do that, emphasizes are given on several issues related to Bank Management. Those issues are Risk management issues, compensation issues, liquidity risk, conduit and securitisation issues, valuation issues, rating agencies issues and transparency and disclosure issues. The worldwide recent financial crisis basically started at August 2007.
Mizen (2009) divided the financial crisis in three phases. The first phase is from August 2007 to February 2008. During this phase inter bank spreads widens and asset backed financial products faced significant reduction in traded volumes. Second phase of the crisis occurred from March 2008 to October 2008, following the near collapse of Bear Stearns. During this phase inter bank spread which had moderated widened again. And finally, the third phase of this crisis (started from October 2008 to present) is the most severe phase.
This phase begins with the bankruptcy at Lehman Brothers. During this phase, all investment banks were seen as vulnerable and took step to merge with stronger partners or became bank holding companies. Besides, inter bank spreads widened much further as LIBOR spiked and official rates were cut very sharply. Banks' shares have drastically lost market value (Wehinger, 2008). There are so many factors behind the financial crisis of recent time. At the initial stage, imprudent policies (mainly related to mortgage) build up problems of a crisis to come (Wehinger, 2008).
Mixing credit with equity culture by bank is another important point (Wignall, Atkinson & Lee, 2008). Regulators and supervisors also lacked diligence and vigilance (Wehinger, 2008). Securitisation and the originate-to-distribute model helped to off-load risks almost as quickly as they were generated. Credit rating agencies couldn't rate the newly generated product efficiently (Wehinger, 2008). Besides, systematic instability, financial institutions internal inefficiency is also responsible.
For example inefficient management of core risks, poorly designed linked between institutions and corporate clients, week form of internal management and lack of transparency (Lumpkin, 2008). According to Lumpkin (2008), besides direct causal factors, spill over of problems is also partly responsible for financial instability. In October 2007, Institute of International Finance's Board of Directors established a committee to develop ways to address market weaknesses and rebuild confidence.
The establishment of the Committee was also intended to facilitate the industry's co-operation with the official sector, the need for which was recognized by both sides. In July 2008, the Committee concluded its work with the presentation of The Final Report of the Committee on Market Best Practices: Principles of Conduct and Best Practice Recommendations – Financial Services Industry Response to the Market Turmoil of 2007-2008. It represents the broad agreement of the Committee, endorsed by the IIF Board of Directors and other IIF member firms, on the need to address the many shortcomings highlighted by the market turbulence.
The Principles of Conduct, Best Practice Recommendations, and Considerations for the Official Sector of the report cover six key topics with their more specific issues; longer-term proposal regarding market monitoring are presented at the end of the Report. "Who was managing the risk? " – After the recent financial crisis this question becomes very common in almost all organization as most of the institute failed to manage their risk. Many observers already tried to find out the shortcoming of existing risk management in Bank and they provide some recommendation.
In order to cope with the current financial Crisis, Bank should undertake a critical review of their risk management practices, besides, Bank should improve the risk culture also (Shimpi, 2009). Shimpi (2009) also emphasize on appointment of a chef risk officer. Many banks already have a CRO, but the CRO's responsibilities must be equal to what Bank is asking them to do. The CRO helps the company hold a mirror up to itself, to help management distinguish between the warts and beauty spots. Using various risk models is very common while predicting future risks. But while using model, single risk methodologies should be avoided.
Besides, over reliance on specific models should also be avoided. When the circumstances are extreme, some common senses should be applied in order to be able to assess the risk (Wehinger, 2008). Supervisors should rigorously assess Basle II applications, including default loss estimates in downturns and the robustness of stress tests (President's Working Group on Financial Markets, 2008)Institute of International Finance emphasize mainly on avoiding incentives for excessive risk taking. Bank should make their compensation practices more reflective of both the risks and returns generated by their employees (Shimpi 2009).
Since profit unfolds over time, rewards should be structured to recognize the fact. Wehinger (2008) suggest that compensation at all management levels should be compatible with long-term shareholder interest and value of the firm, which could be achieved by including deferred and equity-related elements in compensation schemes. The financial industry should align compensation models with long-term, firm-wide profitability. Regulators and supervisors should work with market participants to mitigate the risks arising from inappropriate incentive structures (The Financial Stability Forum, 2008).