The origins of the credit crunch lie in US sub-prime lending, the excesses of which were fuelled by low interest rates. Banks and other financial services firms also exposed themselves to problems in this market by creating and investing in structured products which re-packaged pools of mortgages. “Triple A” ratings for many of these products could not disguise the poor quality of a critical portion of their assets. Although errors have also been committed elsewhere, the conventional, publicly expressed, view is that institutional failures in the US are at the heart of the problem, and fingers have been publicly pointed both at senior financial institutions executives in the US, some of whom have been forced to resign, and at their risk management systems in general.
Our respondents generally supported such a view, although few blame individuals and many also highlight the role of the regulators. A substantial majority of them (73 per cent) blame financial institutions themselves for the problems, even though many of the respondents themselves work for such institutions.
Few blamed individual bankers, despite some high-profile resignations. When they were asked to identify the causes of the credit crunch, 55 per cent pointed to “poor business decisions by banks”, and 38 per cent cited poor lending regulations in the US. A damning 56 per cent believed that banks and other financial institutions did not have sufficient risk management processes in place. Such processes were perhaps being overwhelmed by the lure of lavish, if short term, rewards. A noticeable minority simply cited “greed” as the root cause. As explained further below, there was a growing call for a change in the way bankers are remunerated.
Who do you think is ultimately to blame for the credit crunch?
The greatest impact of the crisis (according to 87 per cent) was being seen in the US. Yet overall the responses suggest that it is not only banks and regulators in the US who will be spending much time consulting, reflecting and repairing their systems following the crisis.
Banks will need to re-assess their entire approach to risk management, which is now coming under fire not just from old school bankers who might be unfamiliar with modern structured products but also from much less risk-averse ones. We have already seen banks replacing or moving their risk management experts in response to the crisis, and of course lending policies have been tightened considerably.
More measures will need to be taken in the future, especially in the drafting of lending terms. “Covenant lite” leveraged deals helped to maintain the pace in the LBO markets, but they have been damaging to banks in tilting the balance in favour of the borrower. A way needs to be found of re-opening the LBO market while avoiding excessive risk taking by banks.
Banks might also have to prepare for closer regulation and will have to change their compliance regimes accordingly.
A small if noticeable minority philosophically cited the “inevitable economic cycle” (11 per cent) as one of the causes of the credit crunch, and it has to be said that bubbles are nothing new: it is the severity of the explosion which is unusual.
To what do you attribute the credit crunch?