Not like any other industries and companies, banking, financial and insurance companies are known to be more exposed to problems and issues. One of the most recent problems in this is the issue in the insurance companies also known as the sub-prime financial crisis. This problem hit United States and other nations and affects international banks and insurance companies. Primarily, the main goal of this paper is to determine the management implications of the crisis in marketing with this insurance and banking and financial industries.
Managing Financial crisis The financial crisis faced by insurance companies which are known as the sub-prime crisis is considered as an ongoing economic problems that manifests itself with the liquidity issues in the banking system which owes to foreclosures that accelerated in the United States that starts in the last part of 2006 and put major issues in the global finance by the year 2007 and 2008.
Such insurance issues starting with the enlargement of United State’s housing bubble (Lahart, 2008, Moyers, 2008) as we;; as the intensive default rates on sub-prime along with the so-called adjustable rate mortgages (ARM) cgenerated to higher-risk borrowers and loaners with lesser credit history or lower revenue lower than other prime borrowers. It has been realized that one of the reasons for this financial crisis in the insurance companies are very varied and complicated.
In this regard, controlling and comprehending the ripple effect through the global economy as well as the management and marketing implication post critical challenges for investors, insurance companies, businesses, banking and financial industries as well as government institutions. In the banking and finance companies and also insurance companies, the sub-prime lending is known as the process of making loans to borrowers which do are not eligible for market interest rates because of different risk concepts, such as size of the income level, down payment, credit history and employment status.
The amount of United States prime mortgages as of March 2007 was $1. 3 trillions (MSNBC, 2008), having over 7. 5 million first-line sub-prime mortgages outstanding balance (Bernanke, 2007). In addition, it has also been noted that there are more or less 16% of the credits of sub-prime with adjustable rate mortgages (ARM) were 3-months delinquent or in foreclosure procedures as of earlier part of the 4th quarter of 2007, nearly triple the rate and amounts on 005 (Bernanke, 2007). By January 2008, the delinquency rate of people who have loans in the sub-prime had increased to 21% in the market (Bernanke, 2008).
It can be said that the financial crisis faced, specifically in the housing industries and insurance companies can be attributed to different aspects. These factors composes of the incapability of the people or the homeowners to create their mortgage payments principally due to several issues in health related factors, loss of employment and insufficient mortgage like short fixed term and also purchase downs adjustable rate mortgages couples that have incentives fast rising adjustable mortgage values and the poor judgement made by the lender or the loaner.
Moreover, the decline and decrease of home prices which made the re-financing more complicated. Because of the changes in terms of the securitization, it can be said that the risks cal also be attributed with the incapacity of the homeowners to pay their mortgage payments which had been distributed widely, that results in consequential effects. Accordingly, there are four primary aspects of risk included with the sub-crime financial crisis and this include the liquidity risks, credit risks, counter parity risks and the asset price risks.
In particular, most of the management of different business are most interested in keeping counter party risks at low degree because of the volume of the bank’s total portfolio is said to be largely identified by their trading activities. It was obviously shown that the counter parity risks linked with the derivative trading activities came from over-the-counter transactions in which additional expense and reduced revenue which has been found from the replacement of the transaction by an equal position in the occurrence of a default is monitored and given specific action.
In this regard, there is a need for people within these organisations, specifically the management and marketing department to conceptualize any ways of minimizing their losses in line with the revenue and expenditure in over-the-counter activities which these organizations are involved. Furthermore, counterparty selection is important so as to sustain the strong hold of the business companies in the insurance and banking industries in the global market.
For instance, the cross-product master netting deals among business partners are also considered to decrease counterparty risks allowed all liabilities and claims which are not yet due to be offset against each in line with the counterparty default. Such aspect can be considered as the contingency action so as to keep marketing and management expensed over the counter transactions at minimum degree while taking into consideration other aspects that causes loss in the revenue.
In addition, the management can also use other approaches like the utilisation of the global multi-stage limit system to adhere to the credit risk exposure in line with credit and counterparty risk management by considering the replacement costs and also other potential price fluctuation in the future which will provide an intensive comprehension as well as holistic view of the financial environment of the insurance and banking industries that guarantees and ensures safety nets among active participants within the banking an insurance companies as well as global banking transactions.
Other management and marketing approach that can be considered is the one in which other banks have used such as the value at risk process in quantifying collateralized business deals as well as simulation procedure for unsecured transactions to evaluate the portfolio as well as the correlations implications for calculating exposure.
Since it has been noted that the potential exposure can be decreased relatively in currency and interest rate transactions, the proceeding business operations of the banks must be made to describe these descriptions to be able to contribute to the entire reduction of loan loss allowances. In terms of the credit risks faced by the industries, such risk is assumed by the banking industries which originates the loan. Nonetheless, because of the major changes with regards to securitization, credit risks are frequently transferred to third-party investors.
With these, the rights to mortgage payments have been considering repackaging into various and complex investment avenue, which universally described as collateralized debt obligations or more commonly known as mortgage-backed securities (MBS). In addition, these industries are also considering the repacking of present debt, and in previous years mortgage-backed securities collateral has establish large proportion of issuance.
In exchange of buying collateralized debt obligations and assuming credit risk, those third party investors have benefited claims on the mortgage assets and relevant cash flows, which has become collateral during the event of default. On the other hand, in terms of the asset price risks, collateralized debt obligations or mortgage-backed securities asset valuation is noted to be multifaceted and relevant fair value or mark to financial market accounting is subject to wide array of interpretation.
In this regard, the valuation is derived from both the emergence of viable market as well as the collectibles of sub-prime mortgage payments within which the assets can be transacted due to its interrelationship. The increasing mortgage delinquency among homeowners has decreased the demand for these kinds of assets. Banking or insurance companies and other investors have noted substantial losses as they revalue their mortgage-backed securities downward.
Various companies that borrowed money through debt obligations or mortgage-backed securities assets as collateral have faced the so—called margin calls, as lending companies are given contractual rights to retrieve their money back. There is a growing issue regarding the notion on whether fair value accounting aspects should not be suspended or temporarily modified, as large write-downs of complex value collateralized debt obligations or mortgage-backed securities assets might generate more problems in the financial sectors (Gross, 2008).
In terms of the liquidity risk, various industries also rely on accessing the o short-term funding market for cash operations and these involve commercial paper and repurchase markets. Insurance companies and other companies as well as structured investment channels often get short-term loans by providing commercial paper, collateralized debt obligations and making mortgage assets as collateral. With this, the investors give cash in exchange for this commercial paper that receive money-market interest rated.
Consequently, because of the growing concerns regarding the value of the mortgage asset collateral connected with the issue of sub-prime and Alt-A loans, the capacity of different companies to manage it and to issue such paper has been implicated and affected (Barr, 2007). Moreover, the interest rate given by various investors to provide loans for commercial paper has increase relatively above the historical level in the previous years (Unmack, 2007).
With the probability that banking and insurance companies may not be able to meet their current and future payment obligations in full in which these organisations would need to settle their liabilities through the use of refinancing their companies is at higher market rates or in the liquidating assets at a discount within the market risks, liquidity risks in which the insurance and banking industries may face must be fully accounted by the management of these companies.
In this regard, the use of risk management has been given importance and these should also be considered by the people within the management and marketing department by integrating risk instruments as part of their daily preparation of a scenario-based run-off profile as well as the associated limit system. Such can provide the banking and insurance companies and management with updated and ready back up or contingency plan in situation s where the business companies might not have the ability to manage some of its obligations in the market environment.
To be able to manage the liquidity risks in the banking and insurance companies, the members of the industry should be able to clearly and efficiently laid out terms of duties and obligation to ensure that there will be systematic and effective strategy in handling their shortcomings. The management of the industry should be designed strategically so that so that internal committees will have the ability efficiently and effectively handle and communicate this kind of issue.
For this issue, the management and marketing department should be integrated to manage the risks in line with the industrial asset liquidity. For this, the liquidity policies that have been conceptualized by the industry’s Treasury as well as risk control group should be made to meet the standards of the internal standards and regulatory requirements that compose the setting of liquidity risk limits and also the generation of an escalation procedure when limits were breached.
With this aspect, banking and insurance companies caters for the companies’ internal and external economic system. Moreover, aside from the mentioned approaches, the volumes of liquid assets, and securities deposited as collateral with banking and insurance companies and unsecured funding through financial markets for certificates for deposit are evaluated on the daily basis. In this regard, the management does not only take into consideration its economic interest as a industry, but also ensures that the trust accorded by the consumers is being met.
Various liquidity inflow and outflow situations and stress tests are initiated by the Risk Control so as to evaluate and assess short-term liquidity mismatch limits and also the long-term refinancing ratio limits. With this aspect, the banking and insurance companies are able to control a systematic system of evaluating the short-term as well as long-term plans and objectives of the industry in terms of growth and development. In addition, securing the market position and advantage of the banking and financial industries also enables them to internationally competitive in their goal to establish strong and diverse market base.
The last aspect is the counterparty risks. Consequently, major investment companies such as banks and other financial companies have been able to consider significant positions in line with the credit derivatives transactions. With this, some serve companies also serve as a kind of credit default insurance. Because of the implications of the risks mentioned the financial health of banking and insurance companies can be able to solve the issue which potentially enhancing the risk to their counterparties, and establishing more risks in financial markets. Conclusions
Banking and financial industries faces some challenges and issues which have some implications on management and marketing performances. The financial crisis have effects which have become critical as well as detrimental to the profit-generating prospects of the industry, specifically during economic fluctuations in the international level. Furthermore, currency rates, foreign exchanges, and also some unexpected changes in the trends which describe the volatile nature of the international market for the banking and financial industries will post issues as well as problems that the management of the bank should urgently address
The possibility that Banking and insurance companies might not be able to meet their current and future payment responsibilities in full or in time, specifically in the business organization’s international transactions in which these organisations would need to settle their liabilities through refinancing when the industries are at their higher market rates or liquidating assets at a discount to the market risks, which in return increases the industry’s responsibility of handling their financial problems.
The company inconsistencies in terms of their operation system because of marketing and management lapses and also lack of efficient communication structure as well as the inability to have an effective and efficient flow of relevant information for the immediate requirements of the banking and insurance companies’ management to provide aggressive solution to the issues relevant to the companies’ operations, post as a barrier to the growth and development of the banking and insurance companies.
The notion that these industries is operating in the international market are also made complex by the requirements preparation and other documentation approaches to complete transaction and also to monitor and evaluate the workflow and performances of the branches has also increases the risk of the banking and insurance companies.
By strategically implementing different approaches to make sure that that the interests of the bank and other insurance companies are secured the management of the company should be able to design and conceptualize efficient business plans and approaches because of the complex structure of the company as well as due to ever-changing economic environment of the banking and insurance companies in the global market.
It can be said that the compliance of the management with international business principles, policies and regulations calls for immediate actions of adapting the policies and laws within these banking and insurance companies to complement with the outside provisions of the industry. Aside from these, the strategic management of the resources of the company and the careful allocation of these resources must also be considered in the banking and financial industries to attain productivity as well as profitability amidst the competitive international banking and insurance industry.
Through the determination of the priorities as well as immediate needs of the banks and insurance companies should be immediately noted and laid out to facilitate and provide essential management and marketing actions which will cater to the company goals and objectives. Even if the financial crisis is still hitting the international market, banking and insurance companies should be able to pursue their actions in thinking of possible ways to limit or totally prevent and avoid the implications of this issue with their companies
It can be concluded that the issue of sub-prime or financial crisis has impacted the performance of various industries in the financial market. The inclusion of Banking and insurance companies with this issue must be immediately given actions by the management without implicating how they perform in the financial market. By and large, it can be said that the Banking and insurance companies crisis is just a part of a larger financial crisis in the international financial system. Such issue in this banking and financial markets is very intense and no one can easily know where the next break in the system will be.
Furthermore, it can be noted that the financial crisis be said that if sub-prime issues would not be able to be solved urgently, and this are said to establish extreme chaos for banking and financial institutions that would lead to major downfall and bankruptcies in the banking and insurance sector which results to turmoil in the international financial system. Reference Barr, A. (2007). Subprime woes infect commercial paper market: KKR Financial, Thornburg, Coventree among firms reporting disruptions. Online available http://www. marketwatch. com/news/story/subprime-mortgage-woes-infect-commercial/story.
aspx? guid=%7B1989DE0D-9031-46A1-B3C5-8E07436CF37C%7D. Retrieve January 15, 2008 BBC (2008). Banking and insurance companiesdrops from FTSE 100. Online available http://news. bbc. co. uk/1/hi/business/7139241. stm. Retrieve January 15, 2008 Bernanke, BS (2007). The Recent Financial Turmoil and its Economic and Policy Consequences, Online available http://www. federalreserve. gov/newsevents/speech/bernanke20071015a. htm Retrieve January 15, 2008 Bernanke, BS (2007). The Subprime Mortgage Market. , Online available http://www. federalreserve. gov/newsevents/speech/bernanke20070517a.
htm Retrieve January 15, 2008 Bernanke, BS (2008). Financial Markets, the Economic Outlook, and Monetary Policy, Online available http://www. federalreserve. gov/newsevents/speech/bernanke20070517a. htm Retrieve January 15, 2008 Gross, D (2008). The Mark-to-Market Melee: Did an obscure accounting rule cause the credit crunch? Online available http://www. newsweek. com/id/130029. Retrieve January 15, 2008 International Herald Tribune (2008). Crisis deepens for Banking and insurance companies. Online available http://www. iht. com/articles/2007/09/17/asia/17northern.
php. Retrieve January 15, 2008 King, M. (2007), ‘Evidence to the Treasury Select Committee’, http://www. publications. parliament. uk/pa/cm200607/cmselect/ cmtreasy/uc999-i/uc99902. htm. Q90. Retrieve January 15, 2008 Lahart, J (2008). Egg Cracks Differ In Housing, Finance Shells. Online available http://online. wsj. com/article/SB119845906460548071. html? mod=googlenews_wsj. Retrieve January 15, 2008 Lim, M. (2008). Subprime mortgage meltdown: Roots of the crisis. Online available http://opinion. inquirer. net/inquireropinion/talkofthetown/view_article. php?
article_id=101568. Retrieve January 15, 2008 Moyers, B (2008). Online available http://www. pbs. org/moyers/journal/06292007/transcript5. html. Retrieve January 15, 2008 MSNBC (2007). Will subprime mess ripple through economy? Q&A: Looking at the impact of the mortgage meltdown. Online available http://www. msnbc. msn. com/id/17584725 Retrieve January 15, 2008 Unmack, N (2007). Rhinebridge Commercial Paper SIV May Not Repay Debt (Update1). Online available http://www. bloomberg. com/apps/news? pid=20601087&sid=aEacPeg9pmLg&refer=home. Retrieve January 15, 2008
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