Question

Banks often claim that credit quality is their highest priority. Yet pressure for earnings in a highly competitive environment often result in Corporate priorities being relaxed. A clear example was the off-balance sheet transactions that were thriving just before the global financial crisis. Consider the Global Financial Crisis and the introduction of various risky asset backed securities and the creation of entities to handle off-balance sheet transactions that resulted in insolvency for many financial entities. Discuss how a Bank with a values-driven culture would have coped during this period. Would a Bank with an Unfocused culture have survived? In your discussion you must justify your arguments with clear explanations referring to both Securitisation and Corporate Culture.

Answer 1

The bank with the value driven culture will be having their credit quality as their highest priority and they will only be trying to incorporate highest standard of value in their operations and they will not be trying to lend to sub-standard borrowers in order to inflate the profits because they will be trying to always maintain the Asset quality to the highest possible extent and they will only be trying to lend after assessing the creditworthiness of the borrower and they will never be trying to infuse higher profitability just to increase their market capitalisation and deteriorating their books of accounts so books of accounts maintenance will be their highest priority and they will be continued to maintain their asset policy and better it. hence such banks with Value driven culture would have survived during such situation because their asset quality would have been better and they would have prepared their strategy in advance and their loans would not have defaulted because they did not have enough exposure in the stressed sector.

Those banks who are having and unfocused culture would not have survived during such period because they would have lent excessively to stressed Assets and their asset quality had deteriorated miserably during such period and they needed various kinds of infusion like bailout in order to survive so survival should never have been easy in such fierce economic downturn for such bank with unfocused culture.

Those Bank who are value-driven will be having high level of collateral against their loans and they will be able to recover those loans value against the collateral whereas those Bank who are unfocused in their operation will not be having highest level of quality assers Android they will be lending excessively Just in order to increase the profit so they would have been suffering to the highest possible extent because the loans have been defaulted and their loan Book has been shrinking as well as their asset quality is deteriorated