Faliure of regulatory policies
I think the root of the fall of the 4th largest IB is the ignorance of parallel banking system which existed in US which includes lehman brothers all the regulations kept focusing on the traditional banking systems which allowed devlopment of these unregulated parallel system.These system financed huge amounts to real estate and consumer borrowing without any deposit base it relied on rollover funding from money markets .These loans were converted into financial intruments and traded among the financial firms and when prices started falling they incured huge losses and there capital wiped out and all the rollover funding got freezed up The basic loop holes in the regulatory and accounting policies were
- As in case of traditional banks there lending was based on custumer deposits and deposits were resonably insured so it provided a kind of shock absorber to them but no such policy exist for parallel banking system
- Lesser control of the fed reserve over such banking system induced them to engage in risker lending
- Fed has provided for all the banks a mark to market accounting but most of them are sheilded from it as most of there loans are held by them and are priced at mark to realization basis but if they are converted into instruments there market value tend to be lower because of market conditions
- Lot of liquidity injections are provided by the fedral reserve to the banks but no such policy exixt for the parallel banking system
so lot of protection is provided to the banks but no such protection exist for parallel banking system so that is what i said that policy need to be reworked for a better financial system
posted by CA.DEEPAK NENWANI @ 6:02 AM
1 Comments
1 Comments:
The reply you gave was just a part of the story. The main reason for it was the their Credit Policy. The NBFCs( which u called parallel banking) were giving loan to Customers based on the value of Mortgaged Property rather than their ability to Pay.
In early 2000, the Credit/Fund managers of US NBFCs smelled the Boom in Real Estate Sector. They came out with the credit policy that they will fund the Loan based on the Value of Property instead of repaying capacity of Borrower and thought that since the Real Estate market is growing, even if the Borrower defaults in repayment, they can make good profits by Selling off that property.
This policy was adopted by almost every NBFCs of US.
In the year 2007-08, the default in Loan shoots up in every NBFCs and all of them ceased the Properties and made theses Properties available for Sale. B'cos of this the Property prices moves southwards and if we imagine of the NBFCs Balance Sheet Assets Side; it has Huge Defaulters as Borrowers and Very Low Priced Ceased Properties.
This is how the banks collapsed suddenly.
Now, I would like you to bring light to your initial comment that the collapse was due to the Accounting Standards and Policies and it requires revision or re-think.
Please explain how accounting policy and standard are responsible for the collapse??? and what can a Chartered Accountant Firm can do to avoid such Collapse???
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