Collapse of world famous banks
Friday, 26 December 2008
Ahmed Showkat Masud
The world has been witnessing an economic recession. Financial institutions, mostly the world famous banks in the USA and European Union (EU), have been the worst sufferers. Problems in managing the loan portfolio is the main reason of the failures of some world famous banks.
Lower consumption of garment items, consumer durables like car, unsold inventories in warehouses in the previous year were some signals for the USA and EU that the upcoming time would be harder. But, nobody could imagine that the world is going to enter into a deeper economic recession.
Lowering of the propensity of consumption is a signal for slow or negative growth of bank deposits. This has caused the banks to depend more on non-deposit borrowings. Borrowings from money and capital markets have increased.
To meet the demands for loans and investments, banks had to rely on money and capital markets. Funds collected from money and capital markets need to be replaced quickly to continue to support the new loans. Selling loans by securitization and replacing them by more marketable assets had been treated as an easy source of meeting fund requirement. Purchasers of the loan-backed securities diversified their investment portfolio with the hope that they would get better return and their portfolio management risk would be minimised. But in reality they did not purchase the securities. Instead, the originating banks sold their claims to match their expected stream of cash that would be generated from securitized loans. The purchaser of those securities had purchased the rights to that cash stream to be generated from securitized loans. But they had no recourse to either the originating banks or their borrowing customers in the event of the securitised loans failing to generate the expected stream of cash as per planned schedule.
In reality this has happened and caused continuous collapse of some world famous banks. This has happened for intensification of the problems of markets and fouled-up investment market. This intensification had been generated by the growing disparity between the rise of loan-backed securities and the absorptive capacity of markets. Management of the collapsed banks were too aggressive in expanding their loan portfolios. They went into overlending where the borrowers received more as loans than they could easily pay back.
(The writer is a banker at Anderkilla Branch of a private commercial bank in Chittagong)
The world has been witnessing an economic recession. Financial institutions, mostly the world famous banks in the USA and European Union (EU), have been the worst sufferers. Problems in managing the loan portfolio is the main reason of the failures of some world famous banks.
Lower consumption of garment items, consumer durables like car, unsold inventories in warehouses in the previous year were some signals for the USA and EU that the upcoming time would be harder. But, nobody could imagine that the world is going to enter into a deeper economic recession.
Lowering of the propensity of consumption is a signal for slow or negative growth of bank deposits. This has caused the banks to depend more on non-deposit borrowings. Borrowings from money and capital markets have increased.
To meet the demands for loans and investments, banks had to rely on money and capital markets. Funds collected from money and capital markets need to be replaced quickly to continue to support the new loans. Selling loans by securitization and replacing them by more marketable assets had been treated as an easy source of meeting fund requirement. Purchasers of the loan-backed securities diversified their investment portfolio with the hope that they would get better return and their portfolio management risk would be minimised. But in reality they did not purchase the securities. Instead, the originating banks sold their claims to match their expected stream of cash that would be generated from securitized loans. The purchaser of those securities had purchased the rights to that cash stream to be generated from securitized loans. But they had no recourse to either the originating banks or their borrowing customers in the event of the securitised loans failing to generate the expected stream of cash as per planned schedule.
In reality this has happened and caused continuous collapse of some world famous banks. This has happened for intensification of the problems of markets and fouled-up investment market. This intensification had been generated by the growing disparity between the rise of loan-backed securities and the absorptive capacity of markets. Management of the collapsed banks were too aggressive in expanding their loan portfolios. They went into overlending where the borrowers received more as loans than they could easily pay back.
(The writer is a banker at Anderkilla Branch of a private commercial bank in Chittagong)