Global Banking Crisis

Answer the following question in the box below: Identify the lessons learned from the prior global banking crisis? What should be done to prevent such a crisis from happening again?

After so much worldwide financial turmoil, learning the right lessons from the global banking crisis is a challenge for the advanced economies and the larger emerging economies whose policies will determine the global financial system over the next several years. The most difficult challenge is not only learning, but applying the lessons learned from the crisis, which proves to be very difficult for all the affected nations and their people whom must live with the consequences. There are various lessons that were learned from the chaotic and disastrous global banking crisis. One of the first lessons that banks discovered is that they must establish an effective governance structure which includes policies dealing with credit risk and specifically with risk tolerance levels. This goes hand in hand with the fact that it is clearly realized from this crisis that credit rating agencies need to reclassify their models used to evaluate cryptic credit risk created in both Mortgage-Backed Securities (MBS) and Collateralized Debt Obligations (CDOs). (Eun & Resnick)

Furthermore, the banking crisis has taught borrowers that they must be cautious of placing their faith in its entirety on credit ratings and therefore must question any discrepancies ahead of time. Another insight that was derived from the crisis is the fact that banks must work and build on credit analyses from the bottom up. Banks must ensure that they will be able to resist a severe market hence their liquidity positions, credit reserves and capital bases must be verified. The global banking crisis has also taught us that bankers do not examine credit risk as strictly when they are only acting as mortgage originators and then pass it on to MBS investors instead of holding it themselves. (Eun & Resnick) Bankers seem to always be willing to lend money to borrowers and this behavior must come to an end. The truth of the entire crisis is that the banking industry must place a higher value on transparency and policies that ensure society that the proper measure and check points are in place in order to avoid another financial crisis.

The major lesson learned from this international crisis which encompassed so many countries and affected so many people is that since there are severe risks involved when lending large sums of money to both sovereign governments and people in different regions of the world, stringent measures, scrutiny and precautions must be used. In the aftermath of the global banking crisis, several measures must be taken in order to avoid this from ever occurring again. For starters, stronger and tighter fiscal and monetary policies must be implemented and enforced to evade another crisis. The first step that banks must take is that they need to identify both the causes and the guilty parties of the banking crisis. The banking industry needs a set of guidelines that should be implemented with an international consensus from all participating nations with recommendations and lessons learned from the global financial crisis that could help the worldwide banking industry.

This industry must understand that they must institutionalize all the lessons that were learned from this crisis. Banks must improve their risk governance structure and processes, determine the risk tolerance levels and hence establish strict reporting and monitoring for significant credit risk exposures, as well as increase the independence of the risk management function. Financial institutions must take a firm stand and work on their credit risk management by incorporating credit analyses into their business decisions. The banking industry must make all these changes to be able to raise the quality, consistency and transparency that they lacked before and during the crisis. Federal regulators must also play their part in preventing such financial chaos by passing and enforcing laws that will assist the banking industry as well as provide assistance with the monitoring and management of risks. Banks must lobby and vouch legislators to pass legislation that ensures any potential future collapses. The Central Bank must also place its grain of rice by implementing an essential infrastructure in order to prevent asset bubbles. Banks and regulators have lots of tedious work to do that involves implementing, enforcing and constantly monitoring any potential risks to the banking industry and thereby avoiding another global financial crisis.