DIPLOMA IN BUSINESS

ASSIGNMENT

Course Title Principles of Banking

Course Code FIN 2013

Academic Session Sep – Dec 2023

Semester 4&6

Lecturer Chow Kim Tai

Assessment Group Assignment

20%
Weighting

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 Released Date Oct 3, 2023

Submission Due Date Nov 7, 2023

Date Received

Marks Obtained

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Student’s Declaration

I certify that this assignment is my own work, and appropriately acknowledged wherever
material adapted from other sources. I understand that plagiarism, cheating, collusion, fraud,
fabrication or falsifications of data are not acceptable. I agree that if at any time it is shown that I
have significantly misrepresented material submitted to Crescendo International College, any
marks or credits awarded to me on the basis of that material may be revoked.

Student Name WOANG ZHE KAI Student ID DB2209277

Signature ZHEKAI Date 1 NOV 2023

Student Name CHONG QI WEI Student ID DB2209256

Signature QIWEI Date 1 NOV 2023

Student Name ALEX TING TIONG HAU Student ID DB2209253

Signature ALEX Date 1 NOV 2023

Student Name CHEE YI XUAN Student ID DB2209294

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Signature YIXUAN Date 1 NOV 2023

Student Name CHAU ZHI YUNG Student ID DB2201008

Signature ZHIYUNG Date 1 NOV 2023

GRADING SHEET
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 Marks
No Weighting
Assessment Awarded
. (%)

1. Introduction (including executive summary) 10%

2. Analysis and Findings (Part 1) 15%

3. Recommendation & conclusion 10%

4. Overall impression:

 Cover page, Content page

 Headings, subheadings and overall layout

 Correct font, font size and line spacing (Time New

 Page number and alignment (left justified)

 Structure, spelling, grammar, choice of words, etc

 Correct APA style

5. Power point slides 10%

6. Presentation 30%

TOTAL 100%

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 TABLE OF CONTENTS

Contents Pages

Introduction 7

Analysis & Findings (Part 1) 8-12

Analysis & Findings (Part 2) 13-15

Recommendation & conclusion 16

INTRODUCTION

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In the long history of finance, a lot of issues have arisen, among the worst of which are financial

crises. In recent years, more specifically in 2007, a global financial crisis occurred. A financial

crisis is which some financial securities suddenly suffer a huge decrease in their value during a

wide variety of situations. Types of financial crises include banking crises, currency crises,

speculative bubbles, and crashes etc. In this report, we will emphasize the US and Europe

Banking Crisis. A banking crisis reflects the crisis of liquidity and insolvency of one or more

banks in the financial system. Owing to its substantial losses, the bank is severely short on

liquidity, which has made it difficult for it to fulfill its obligations under loan agreements and to

meet depositor demands for withdrawals. Undoubtedly, US and Europe are the largest banking

countries in the world. They playing an important role to influence the global banking sector.

During the Global Financial Crisis 2007, one of the main causes is a process is called

“securitization”. (What is Banking Crisis | IGI Global. (2016). Igi-Global.com. https://www.igi-

global.com/dictionary/early-warning-system-for-banking-crisis/51063).

ANALYSIS AND FINDINGS (PART 1)

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The “Securitization” process

The first step in securitization involves the originator, who organizes receivables, loans, and

leases into categories comparable in maturity, credit risk, or interest rate risk, acting as the bank

or financial institution. Next, asset collection is transferred to a Special Purpose Vehicle (SPV), a

trust, which can be jointly launched by banks, financial institutions, originators, and other

securitization entities or listed as a limited corporation subsidiary. The third step is the SPV

divides various assets into asset-backed securities, such as pass-through or pay-through

certificates, which are issued as certificates of beneficiary ownership or debt, depending on

interest rates and maturity dates. Step 4 involves disbursing funds for securities, where the

servicer accumulates principle and interest payments on loans, leases, and receivables, and

investors receive their payments, with the originator potentially being the service provider. The

last step in securitization involves credit scoring, where certified agencies provide pass-through

certifications with a credit rating, enhancing their creditworthiness through prompt principal and

interest payments by SPV. (Yubi. (2022, September 27). Process of securitization: Everything

you should know. Yubi. https://www.go-yubi.com/securitisation/process/).

How banks use this financial engineering to combat their credit squeeze problem especially

in the time of rapid property mortgage loans growth building up to Global Financial Crisis

of 2007.

Banks using securitization to combat their credit squeeze problem especially in the time of rapid

property mortgage loans growth building up to Global Financial Crisis of 2007. Securitized

investments' returns are determined by the income received from the underlying asset, often

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based on debt. Financial agreements, like mortgages or student loans, have predetermined

interest rates and payback schedules, allowing investors to structure their products accordingly.

Banks securitize groups of mortgages, guaranteeing a rate of return based on individual mortgage

interest rates and payback terms. Investors should evaluate this guaranteed rate of return based

on the underlying mortgages' credit ratings. Non-debt items can be used to create securities if

they provide a profit around which the security's rate of return can be built. For example, if you

want to securitize artwork, you could compile hundreds of works into a portfolio, with the

returns on shares depending on the price you can eventually sell each piece. However, attracting

investors into such a speculative portfolio remains a challenge. (Lake, R. (2023, October 13).

How a Ria can help manage your real estate investments? SmartAsset.com.

https://smartasset.com/investing/ria-real-estate).

The causes and consequences of Global Financial Crisis 2007 including the ‘too big to fail

problem’

One of the causes of Global Financial Crisis 2007 is Banks and lenders were preparing to issue

more high-risk loans due to the favorable economic climate. They became more competitive by

extending larger house loans, which appeared profitable. However, many home loan providers

did not thoroughly evaluate clients' ability to repay loans and did not exercise caution when

making loans. Instead, they offered investors large amounts of loans, often in the form of

mortgage-backed securities (MBS) packages. MBS products were considered safe by external

authorities but became more complicated and opaque over time. Investors who bought MBS

packages believed they were purchasing a low-risk asset, expecting most loans to be repaid.

Large US banks and international banks from Europe were among those seeking profits beyond

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their own markets. The global financial crisis was also caused by increased bank and investor

borrowing, as banks and investors in the US and overseas borrowed more money to buy MBS

securities. This increased borrowing led to significant losses when property values declined.

Additionally, banks and investors borrowed for shorter periods, even overnight, to buy assets that

wouldn't sell rapidly. As a result, they became increasingly dependent on lenders, including other

banks, as their short-term loans were paid back. The MBS crisis was largely due to insufficient

regulation and policy, particularly in the organizations that produced and offered investors

opaque and complicated MBS products. This led to many borrowers receiving loans too large for

repayment, and fraud became more prevalent. Examples of fraud included overstating borrowers'

income and misleading investors about the security of MBS products. Governments and central

banks were unaware of the widespread mortgage losses and faulty loans during the boom.

Securitization, the practice of banks packaging and selling subprime mortgages and other

consumer debt as securities, contributed to the expansion of subprime lending. Mortgage-backed

securities (MBSs) were bonds made mostly of mortgages that allowed buyers to receive a portion

of the interest and principal payments on the underlying loans. Buying MBSs allowed banks and

investors to diversify their portfolios and make money, while selling subprime mortgages as

MBSs improved liquidity and reduced exposure to problematic loans. As home prices continued

their meteoric rise, MBSs became widely popular, and their prices in capital markets increased

accordingly. The SEC relaxed the net-capital requirement, encouraging banks to boost MBS

investments. This resulted in significant gains but also put banks' portfolios at risk due to the

potential for the housing bubble to continue. (Reserve Bank of Australia. (2023, May 26). The

global financial crisis: Explainer: Education. Reserve Bank of Australia.

https://www.rba.gov.au/education/resources/explainers/the-global-financial-crisis.html).

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Consequences of Global Financial Crisis 2007 led to the Great Recession, a severe economic

downturn that quickly spread to neighboring nations, including the US, and was the longest and

most severe in several countries. The U.S. housing bubble burst in 2007, leading to a financial

crisis. Banks offered mortgage loans to millions of consumers at reduced interest rates,

increasing demand for new homes and driving up existing home prices. However, interest rates

rose in 2005, causing a dip in home prices. Most subprime borrowers, who had adjustable-rate

mortgages, couldn't make loan payments due to rising interest rates. They couldn't save

themselves by taking out loans against the rise in house value or selling their houses for profit.

Banks stopped lending to subprime borrowers as foreclosures rose, further decreasing demand

and prices. The financial crisis impacted the global financial markets and the economy. The

subprime mortgage market crash caused significant difficulties for banks due to the combination

of subprime loans and less hazardous consumer debt. This led to an interbank credit freeze,

making it harder for banks to provide credit to financially stable clients, including businesses.

This led to reduced spending and investments, job losses, and a decline in demand for products.

The difficulty in tracking underlying subprime loans in each MBS led to banks questioning each

other's solvency, resulting in a decline in demand for their products. (Duignan, B. (2023,

October 23). Great recession. Britannica. https://www.britannica.com/money/topic/great-

recession).

"Too big to fail" refers to a business that is so integrated into the global economy that it would

collapse under its own weight. During the 2008 financial crisis, the phrase gained popularity to

explain the need to rescue financial institutions that relied on derivatives for a competitive edge.

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These banks, which grew too large due to their excessive derivative investments, were in need of

rescue to prevent a global economic meltdown. The Dodd-Frank Act, which replaced the Glass-

Steagall Act of 1933, was the most extensive financial reform. It established the Financial

Stability Oversight Council to prevent banks from growing too big to fail and regulate financial

markets. The council also manages nonbank financial institutions like hedge funds. If banks

grow too large, the Federal Reserve may regulate them. The Volcker Rule restricts the level of

risk big banks can assume, forbidding profit-driven trading for protection or client protection.

The act aimed to reduce the likelihood of another economic disaster. (Amadeo, K. (2022, May

31). What is too big to fail? The Balance. https://www.thebalancemoney.com/too-big-to-fail-

3305617#toc-preventing-banks-from-becoming-too-big-to-fail).

ANALYSIS AND FINDINGS (PART 2)

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The causes of these banks’ failures (Silicon Valley Banks, Signature Banks and Credit

Suisse) are as follows:

 Bank Run: After SVB announced their $1.75 billion capital raising, people knew that the bank

was short on capital and it spread quickly on social media, inducing panic among the people.

So, customers started to withdraw money in waves (bank run). In return, SVB suffered another

round of capital losses, causing SVB to fail eventually. (Hetler, A. (Ed.). (2023, April 20).

Silicon Valley Bank collapse explained: What you need to know. WhatIs.com.

https://www.techtarget.com/whatis/feature/Silicon-Valley-Bank-collapse-explained-What-you-

need-to-know).

 Poor Management: Before the collapse, federal prosecutors and the Securities and Exchange

Commission (SEC) were investigating Signature Bank’s suspicious cryptocurrency business,

particularly regarding money laundering. Regulators closed the bank, thinking than the bank’s

management did not seem to pay much attention to its banking operations. (Larsen, N. (2023,

June 7). What the collapses of Signature Bank and Silvergate capital mean for crypto.

International Banker.com. https://internationalbanker.com/technology/what-the-collapses-of-

signature-bank-and-silvergate-capital-mean-for-crypto/).

 Scandal: Credit Suisse had had a lot of scandals and one of them is money laundering which

includes a conviction of counts of money laundering by some former employees. As a result,

Credit Suisse’s share price began to slide and the bank eventually failed. (Bianchi, D. G. (n.d.).

Banks failing: Lessons learnt from the Credit Suisse collapse - part 1.

www.hospitalityinsights.ehl.edu. https://hospitalityinsights.ehl.edu/banks-failing-lessons-

learnt-credit-suisse-collapse-part-1).

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The consequences of these banks’ failures:

 SVB: SVB stockholders and investors took a big hit because they were not backed by FDIC on

their investments. (Hetler, A. (Ed.). (2023, April 20). Silicon Valley Bank collapse explained:

What you need to know. WhatIs.com. https://www.techtarget.com/whatis/feature/Silicon-

Valley-Bank-collapse-explained-What-you-need-to-know).

 Signature Bank: It have prompted declines in US treasury yields, USD index and interest rate

expectations (FED swaps). The prices of gold and silver have risen due to their safe-haven

appeal, while other resources like oil, natural gas, copper, and agricultural commodities have

fallen due to a potential economic slowdown. (Oak North Credit Intelligence. (2023, March

16). Failures of Silicon Valley bank and Signature Bank: The Potential Economic and Credit

Implications. www.onci.com. https://www.onci.com/blog/svb-signature-implications).

 Credit Suisse: After the collapse, it has made investors to lose confidence in investing into

Swiss corporate bonds because they think that it is too risky. Furthermore, it also impacts

Switzerland’s reputation as a country of remarkable financial stability. (Allen, M. (2023,

March 20). Credit Suisse collapse: Consequences and open questions. www.swissinfo.ch.

https://www.swissinfo.ch/eng/business/credit-suisse-collapse--consequences-and-open-

questions/48375346#:~:text=Global%20effects&text=The%20takeover%20resulted

%20in%20CHF16,holder%20told%20the%20Financial%20Times.).

Will these banks’ failures lead to another global financial crisis?

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Despite these banks’ failures, financial experts think that there will not be a global financial

crisis. One of the experts, Beck said that other European banks may be affected but it will not

cause a global financial meltdown because the banking systems have improved and authorities

are much prepared to deal with these situations. (John, P, (2023, March 21). Credit Suisse and

SVB: Is global banking in crisis? www.aljazeera.com.

https://www.aljazeera.com/economy/2023/3/21/credit-suisse-and-svb-is-global-banking-headed-

for-crisis).

RECOMMENDATION & CONCLUSION

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In light of the recent failures of banks like Silicon Valley Bank, Signature Bank, and Credit

Suisse, it is important to emphasize that these incidents are unlikely to trigger another global

financial crisis. The financial industry has made significant improvements in risk management,

regulatory oversight, and crisis response mechanisms since the 2007 financial crisis. While these

specific bank failures have had consequences, they are isolated incidents driven by individual

circumstances and management issues. To reduce the risk of future banking crises, it is crucial

for financial institutions to continue adhering to robust risk management practices and regulatory

compliance. On the other hand, Governments and regulatory authorities must also maintain

vigilant oversight of the financial sector, taking prompt action when necessary to prevent

systemic failures. In conclusion, while these recent bank failures are concerning, they do not

signal an impending global financial crisis. Thanks to the lessons that we have learnt from past

crises, our financial systems have become more regulated and resilient, and with continued

diligence, the stability of the global banking sector can be maintained.

(1895 words)

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