Credit risk management | Nursing homework help
Many banks were not able to effectively manage risks prior to the financial crash. They believed that investment would be stable, and they wouldn’t lose any money during recessions. In order to maximise their profits, banks took on greater risks than necessary. In some instances, banks did not recognize and account for increased risk with certain investments like sub-prime mortgage-backed security derivatives or securities. Even experienced bankers struggled to understand these products and underestimated the risks involved with them.
Many banks also did not have sufficient systems and procedures to effectively manage risk. Investment bankers were able to take too many risks without being supervised by the senior management. Banks used complicated financial instruments, which made it challenging for auditors as well as regulators to detect potential problems before they escalated.
Another contributing factor was the culture that was focused on short-term profit and not long-term stability in the bank system. This encouraged reckless behavior by both lenders and investors, which ultimately led to the financial crisis. All these factors together meant that when economic conditions deteriorated severely enough most banks were unable or unwilling able adequately prepare themselves against potential losses; eventually leading up what came be known as “the Great Recession” around 2008/2009