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Bank Risk Taking Strategies before the Crisis - Essay Example

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The present essay "Bank Risk-Taking Strategies Before The Crisis" dwells on the strategy that was applied to minimize the chances of bank customers withdrawing their deposits. As the text has it, this serves to ensure that the bank liquidity and capital base is maintained high. …
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Bank Risk Taking Strategies before the Crisis
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Download file to see previous pages A lower monetary policy increases the bank’s risk-taking. When the monetary policy is low, it impacts on the loan industry’s ability to lend and give a mortgage. It also impacts on the consumer and the business loan interests. These insufficient considerations to protect the losses that could be incurred through loan defaulters, just served to increase the inappropriate usage by the loan borrowers. This created a need to put into place the measures that reduced the misuse of these funds. Therefore, a well laid down strategy integrating the mode of pay and the borrower’s loan thresh hold and ability to service it had to be established (Jaffee, 2010). This measure was meant to eliminate the motivation that encouraged the borrowers to take higher risks of unplanned for huge sum borrowing. Executive compensation arrangements is an arrangement that enabled the executive to get huge cash amounts of equity based and bonus compensation before the long-term consequences of decisions are realized. This motivated the executive to only pay attention to the short-term outcomes and fail to focus on the long-term adverse effects this had on the shareholders. This, therefore, called for the implementation of adequate legislation that would minimize the chances of the executive undertaking activities that exposed the banks to higher and excessive levels of risk-taking. There has been found to have a need to instill into the bank's management a good system of eliminating these risks. Secondly, internal Investment is another strategy that was applied to most of these banks. There was a high tendency of the executives of these banks to invest heavily on the shares of the banks they headed. Consequently, this tendency made them disregard the possibility of falling into a crisis. They only perceived the upward trend of investing more and more to increase their shareholding in their companies. According to Calomiris and Mason (2004), it is against this background, that a need to regulate the executive pay was realized. This move is to ensure that the executives’ financial capacity is strongly linked to the shareholder's interest. This being the case, the executive is hindered from possessing the great ability to invest highly into the organization they are heading. This ensures a reduced executive’s ambition and consequently instills a sense of vigilance and supervision of lending activities by their banks. Bank performance Inflow of foreign currency Banks totals assets in millions AGRI BANK 39866.5 47007.4 52264.0 63285.8 66143.3 AMEGY 9351.94 10359.2 11836.1 12354 11089.3 ALLIANCE 9490.5 10601.1 9368.8 8503.5 172313.0 Years 2005 2006 2007 2008 2009 There was an influx of foreign currency from other continents. It is this influx of these foreign currencies that resulted in the relaxation of the lending terms by the banks. This served to enable the business community to invest in the housing market. Later, the value of the houses greatly declined and consequently, there were greater losses incurred by those who had invested in homes. These lose in turn enhanced the high rate of defaults in loan repayments, which into a large extent minimized the financial stability of the banks. The bank's instability affected the overall performance of the economy by slowing it down to relatively low growth rates. ...Download file to see next pagesRead More
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