Factors That Lead to the Breakdown of the Financial Markets - Essay Example

The Proposed Strategies Of HSBC Bank in UK In the Light of the Global Financial Crisis Table of Contents ………………………………………………………………………………....3 Introduction…………………………………………………………………………….…4 Background of HSBC…………………………………………………………………….4 Background of the Crisis………………………………………………………………….5 Factors that lead to the Breakdown on the Financial Markets…………………………….6 Scale of the Financial Crisis………………………………………………………………7 Effects of the Financial Crisis……………………………………………………………..8 SWOT Analysis of HSBC………………………………………………………………...8 Proposed Strategies of HSBC……………………………………………………………..9 Analyses………………………………………………………………………………….10 Conclusion……………………………………………………………………………….11 References……………………………………………………………………………….12 Abstract The objectives of this essay are threefold: (1) to briefly explain the factors that brought about the breakdown of the global financial markets (2) to determine the possible effects on the operations of HSBC in UK utilizing SWOT analyses; and (3) to present the strategies that HSBC should adopt to achieve her vision and restore public confidence. INTRODUCTION Our world today is beset with financial crisis of insurmountable coverage. A multitude of corporations on a global scale declare bankruptcy and render thousands of employees jobless. The inevitable nature of factors which interplay and caused this financial turmoil on a global scale deserves a closer examination. Several financial institutions are most affected by the crisis, of which HSBC Bank is one. This paper would present pertinent issues resulting to the breakdown of the financial markets of the world and propose strategies to enable HSBC to achieve its organizational goals by: (1) briefly explaining the factors that brought about the breakdown of the global financial markets (2) determining the possible effects on the operations of HSBC in UK utilizing SWOT analyses; and (3) presenting the strategies that HSBC should adopt to achieve her vision and restore public confidence BACKGROUND OF HSBC HSBC Bank has been operating in England and Wales at the registered office located at 8 Canada Square, London E14 5HQ. It offers a diverse portfolio of financial instruments including savings and current accounts, investment accounts, credit cards, loans, mortgages, insurance and international services. It supports a wide range of education projects and initiatives throughout the communities where they do business. In addition, “HSBC supports a wide range of projects and initiatives that underline their commitment to UK businesses.” (HSBC 2009) The management of HSBC promotes diversity and equality of opportunities through programs where they establish partnerships with other business organizations. Accordingly, “representatives of HSBC Bank plc can provide advice on investment and pension products from selected providers, including companies within the HSBC Group, and on life insurance products from HSBC Life (UK) Limited.” (ibid.) BACKGROUND OF THE CRISIS Jarvis (2009) gives a concise and easy to understand presentation of the credit crisis in his video The Crisis of Credit Visualized. According to Jarvis, “the credit crisis is a world wide financial fiasco involving terms you probably heard such as: sub-prime mortgages, collateralized debt obligations, frozen credit markets and credit default swaps where everyone is affected” (Jarvis, Jonathan, “The Crisis of Credit Visualized”. Vimeo. . 2009). This was brought about by financial investors searching for homeowners who are willing to mortgage their properties. Traditionally, these financial investors go to US Federal Reserve where they buy treasury bills which were believed to be the safest form of investment. However, due to the Bust.com which occurred in September 11, Federal Reserve Chairman, Allan Greenspan lowered interest rate to 1% to keep the economy strong. This lead to financial investors searching for alternative investments which would give them higher yields. There was an abundance of money, then, with Asian investors offering their surplus in the US financial markets. This makes borrowing easy and causes banks to utilize leverage. Jarvis defines leverage as borrowing money to amplify the outcome of a deal. When everything went fine with investing on prime mortgages, other investors sought more resorting to the utilization of sub-prime mortgages, which is the turning point of the financial crisis. “The sub prime crisis came about in large part because of financial instruments such as securitization where banks would pool their various loans into sellable assets, thus off-loading risky loans onto others”. (Shah, Anup. “Global Financial Crisis”. Global Issues. < http://www.globalissues.org/article/768/global-financial-crisis#globalissues-org> 2009) What started out as a lucrative investment in Wall Street, cascaded into other areas due to the lure of financial profits. Due to the composition of risky mortgages, investors started to have problems in collecting payments which led to bad loans and foreclosure of properties. These properties eventually started to decline in prices due to the economies of supply and demand. Soon, banks and investors could not get back the money they invested and could not repay their loans. With large capital reserves ran out, these banks had to turn to the government for bail out. MODUS OPERANDI THAT LEAD TO THE BREAKDOWN OF FINANCIAL MARKETS As simply put, the root of the breakdown of the financial market was the unattractive interest rate provided by the US Federal Reserve led investors looking for other alternative investments which would give those profits. Their utilization of sub prime mortgages was a risky investment that eroded the financial system. According to Raja (2008) “The downturn after four years of relatively fast growth is due to a number of factors: the global fallout from the financial crisis in the United States, the bursting of the housing bubbles in the US and in other large economies, soaring commodity prices, increasingly restrictive monetary policies in a number of countries, and stock market volatility.” (Raja, Kanaga. “Economic Outlook Gloomy, Risks to South, say UNCTAD”. Third World Network, September 4, 2008.) Shah (2009) stipulated that a contributory factor to the decline of the financial system, originating in the United States, is the issue of the derivatives. According to Dictionary of Financial Terms (2008), derivatives “are financial products, such as futures contracts, options, and mortgage-backed securities. Most of derivatives value is based on the value of an underlying security, commodity, or other financial instrument.” (Dictionary of Financial Terms. “Definition of Derivatives”. Lightbulb Press, Inc. Retrieved from . 2008.) In Shah’s research, derivatives accelerated the downfall because “it gives you the right to buy something in the future at a price agreed now.” (ibid) The concept ingrained in the derivatives is the theory of speculation. When one speculates, there is the inherent risk associated therein because of the aspect of the future. Nobody really knows what will happen in the future. SCALE OF THE FINANCIAL CRISIS AFFECTING DEVELOPED COUNTRIES It is important to determine at this point the scale of this global financial crisis. According to Bloomberg (2009), “from a world credit loss of $2.8 trillion in October 2008, 14.5 trillion, or 33%, of the value of the world’s companies has been wiped out by this crisis. The UK and other European countries have also spent some $2 trillion on rescues and bailout packages.” (Pittman, M. and Ivry, B. (2009). “US Taxpayers risk $9.7 Trillion on Bailout Programs”. Bloomberg.com. Retrieved from ) The devastating part about this is since the United States is considered one of the most powerful countries in the world, this financial crisis cascades to the rest of the countries directly or indirectly doing business with it. A number of financial institutions and business enterprises fail and close in countries such as Europe, Iceland, and Asian countries like Japan, China, India, from among the rest. EFFECTS OF THE FINANCIAL CRISIS From among the most serious effects of this crisis, the repercussion on supply and demand for food is the most crucial. With manufacturing companies closing, prices of commodities are likely to increase. With people losing their jobs, there is less money to buy basic commodities. In addition, with credit problems in the West, poor countries would receive less financing for development. This would also mean loss in tax revenues which, according to Shah (2009) “revenue is significant for poor countries. It could reduce, or eliminate the need for foreign aid (which many in rich countries do not like giving, anyway), could help poor countries pay off (legitimate) debts, and also help themselves become more independent from the influence of wealthy creditor nations.” (ibid) SWOT ANALYSIS With the extent of drastic effects that the financial crisis have wrought, HSBC Bank remains strong in the market due to its strengths, as presented: (1) diversity of financial portfolio; (2) a strong customer relations skills; (3) a competent and professional management; (4) extensive global reach; (5) substantial resources. The weakness which can be seen is the effect of competition in its continuing operations. With the number of banks currently existing and fighting for market shares, HSBC is not except from competitive threats. This threat is exacerbated by the effects of the financial crisis on personal funds that investors have and are willing to put in the financial institutions. However, instead of dwelling on these as threats or weaknesses, HSBC Bank sees these as opportunities and challenges to improve on their products and services, especially on the quality of mortgages that they offer. It offers specialist mortgages and a variety of payment options. PROPOSED STRATEGIES OF HSBC HSBC has over 125 million customers all over the world with 25 million registering for internet banking (Subramanian). It employed about 55,000 staff in the United Kingdom. One of the strategies implemented by HSBC is “Managing for Growth”, building on the company’s strengths and addresses areas where improvement have been identified as desirable and attainable (ibid). HSBC continues to pursue its vision of being the world’s leading financial services company. Accordingly, by leading, they mean: “preferred, admired and dynamic and being recognized for giving the customer a fair deal”. (ibid) This vision is aimed to be achieved by emphasizing corporate values such as “long term ethical client relationships; high productivity through teamwork; a confident and ambitious sense of excellence; being international in outlook and character; prudence; creativity and customer focused marketing”. (ibid) By being aware of their strengths, HSBC can utilize these to sustain market share and to convince the public that they have not resorted to sub prime mortgages which were the ultimate cause of the financial breakdown. By acknowledging that HSBC still emphasize the utilization of prime mortgages and employ the necessary steps to ensure that their customers were appropriately assessed to ensure regular payments, the company would assure the public that they adhere to the vision, values and corporate responsibility in their banking practices. Since HSBC has a wide global reach and enormous financial resources, the public would be assured that their products and services were least affected by the financial turmoil. ANALYSES OF THE SITUATION AND WAYS TO CONTROL THE CHALLENGES The background of the essay identified the root of the breakdown of the financial markets of the world as stemming from the low interest rate imposed by the US Federal Reserve. The interplay of factors enumerated herein particularly investing in sub prime mortgages, relying on leverage and derivatives, and capital reserves running out, created a crisis so severe that the situation became unmanageable and complex. As Shah (2009) aptly analyzed the situation, “As people became successful quickly, they used derivatives not to reduce their risk, but to take on more risk to make more money. Greed started to kick in. Businesses started to go into areas that were not necessarily part of their underlying business. In effect, people were making more bets — speculating. Or gambling.” (ibid) The serious repercussions it created were its effects on the economies of all neighboring countries in scales so enormous that it continues to threaten the lives and survival of people, especially in poor countries of the world. The effects of global food crisis, bankruptcy, credit crunch, and decline in the confidence in the financial market are still eminent that until now, solutions seem to be far from reach. Further, it diminished the confidence on financial institutions which are pinpointed as the cause of the financial breakdown. However, like HSBC, other financial institutions could restore confidence in financial services by adhering to the high standards of the codes of banking and those set by the Financial Services Authority. CONCLUSION The breakdown of the financial markets of the world is, sad to say, attributable to a few, who have had such insurmountable opportunities to enrich themselves that they failed to realize that their actions could devastate and affect the whole world. In the midst of the effects of this crisis, global enterprises are all struggling to regain their market shares. For financial institutions, greater challenges are faced in regaining public confidence. These could be difficult given the circumstances but not futile. A creative manager who knows all about his company could devise strategies to ensure that it would continue to pursue its mission and vision regardless of the seemingly insurmountable tasks which lie ahead. References HSBC Bank plc. (2009). About HSBC. Retrieved on April 11, 2009 from Jarvis, J. “The Crisis of Credit Visualized.” Retrieved on April 11, 2009 from Read More