Weak Bank Regulation to Blame for the Credit Crisis?
The Organization for Economic Co-operation and Development (OECD), “blasted the regulatory framework as “very poor” because not only did it fail to prevent the crisis but also contributed to it”. According to the OECD, the source of this financial crisis can be traced back to 2004, presaged by four events.
The first event was President Bush’s proposals to make it easier for poor Americans to obtain mortgages.
“Second was the tougher capital requirements imposed on the mortgage finance groups Freddie Mac and Fannie Mae, which triggered an invasion of banks into their territory.”
“Third was the transition towards Basle II, which made mortgage lending more attractive and fostered the creation of off-balance sheet vehicles.”
“The final element was a policy shift by the Securities and Exchange Commission, which allowed investment banks to increase their leverage from about 15 to one to as much as 40 to one.”
Ultimately this set of relaxed regulatory frameworks paved the way for risky lending policies and less than secure investment vehicles that were flooded into the market. The sub-prime mortgage lending and mortgage backed securities were the sum total of these two practices that have led the global financial market into the state that it is in now.
“The OECD also blamed “a massive failure in corporate governance”, the bank bonus culture, the credit-rating agencies and the lack of due diligence by institutional investors for exacerbating the crisis.” This illustrates the fact that the banks are not the only culprits responsible for this financial mess. For instance, if the credit-rating agencies actually followed the 5 C’s of credit (Capacity, Capital, Collateral, Character, Conditions), then a lot these risky mortgages would not have been issued. Ultimately, what is needed is a return to a more conservative banking sector with a new strategic regulatory environment.
~ by maniebrahimi on June 14, 2009.
Posted in Sources of the Social Problem