Bank Management and Electronic Banking (FIN-441)

Assignment 1

Section: 01
Summer 2020

Submitted by

Name ID Gsuit Email

MD. Wasib Islam 16204014 [email protected]
Abdullah Naser Nabil 16204020 [email protected]
Humayara Afroz 16204007 [email protected]
Rezwan Al Bukhar 17104234 [email protected]

Submitted to
Mrs. Sohana Wadud Ahmad

Lecturer, BRAC Business School, BRAC University

Date of Submission (9th November, 2020)

Answer to the question no:1

From the case study we found that there are some reasons and responsible for the failure of
Leham Brothers

 Leham Brothers was investing in mortgage bank securities. They acquired five
mortgage lenders, including subprime lender BNC mortgage and aurora loan
service. They basically focus on the subprime mortgage is a type of loan granted
for individual with poor rating. Without proper document they granted the loan to
individual that is one of the major reasons for the failure of Leham brothers.
 Another important reason is the liquidity crisis are responsible for the failure of
leham brothers. When the lack of liquid short-term asset to cover for short term
liabilities. On that time the customers want to withdraw their deposit as a result
Bank run happened.
 Complicated capital structure is one of the vital reasons for the failure of leham
brothers. On that time the leham brothers are related with different business areas.
For example, investment banking, capital, mental, investment management that is
why the capital structure are more complicated.
 The leham brothers are conducting with very weak management practice. Their
business expansion policy, future objective ever the unrealistic accounting and
finance practice has a vital effect for the failure of leham brothers.

The Leham brothers could have done differently to avoid this problem by taking some step while
conducting their business.

 When they invested in mortgage bank securities, they try to focus on subprime mortgage
which is not a perfect decision to give a loan for the poor rating organization.
 For the crisis of liquidity, they need to have a minimum funds on bolt to avoid the
liquidity crisis.
 As the lehman brothers are related with a wide range of business so they need to focus on
the capital structure since they are related to huge one of business.
 They used to a very weak management practice as a result the failure comes so they need
to improve their whole management practice.
Answer to the question no:2
We have noticed some steps taken by the Leham Brothers to manage their risk.

 The Leham brothers basically focuses on the annual growth of revenue and as a
result they are tried to a very quick growth of capital base that lead to a very risky
capital structure risk.
 To avoid the risk and over take the rivals they made a major change on their
business strategy. The Leham Brothers was changing their brokerage model from
lower risk to higher risk. As a result, a very sensitive change on the business
strategy lead to a big challenge for the Leham Brothers.
 Another very vital steps taken by the Lehman Brothers was instead of making
money transaction. They shifted towards making money on long-term investments
as a result the earning of revenue was very tough since it is a long-term process.
 Lehman brothers was tried to focused on expanding their specific areas of
principle investment like commercial real estate, leveraged loans and private
equity since they want to over take the rivals the are going to take these
investment policies to increase annual revenue.

Answer to the question no:3

We know about the systematic risk, which is basically the liquidity crisis and the bank
insolvency. When the fund is not enough liquid short-term asset to cover for short liability is
basically the liquidity crisis. Lehman brothers face the situation that their liabilities are much
higher than the asset. In this situation the customer wants to withdraw their deposit. As a result,
the bank run occurs. The work condition of a bank is going to affected another bank. When one
bank is facing liquidity crisis then they cannot capable to pay another bank as a result all the
banks will become affected. In this situation people are concern about their deposit and they try
to withdraw all the deposit from the bank.

Answer to the question no:4

In my opinion the administration did not effort to save Lehman Brothers for some certain
reasons. Firstly, right off the bat around then because of incredible rescission loan cost was
decline down accordingly financial exchanges were additionally following its stock cost and
investment bank like Lehman Brother were begun to consider bringing new item into the market.
In this way, considering that reason they entered to contract market security by purchasing two
home loan organizations, one is Arora Mortgage Company and the other is B&C company.
Subsequent to entering to that market they had begun to give the credits to the advance searchers
by keeping their home as a sold towards the bank they likewise, presented new approach which
is called ‘Mortgage Back Securities’ into the marketplace as well. Afterwards, they presented
"CDO's" into the market moreover. Following to watching their such exercises, it very well may
be handily said that variety in the speculation of their arrangement was obvious. Which means
that they were attempting to include themselves on to different areas which fell over the long
run. Moreover, the size of the credit they were expecting to rescue were likewise an excess of
high and they were unequipped for indicating the skills of the activity to the legislature at that
circumstance. In 2008 the global financial system remained on the authority of failure. i The
catastrophe of the United States investment bank named Lehman Brothers made the financial
crisis even more deprived. Policy makers strictly justified that they did not have enough legal
authority to rescue Lehman because Lehman did not have sufficient collateral for the loan they
required for survival. That time the policy maker was fortified that they don't have adequate
lawful power to deliver Lehman Brother. In view of the political impact and financial danger, the
save bank was not prepared to spare Lehman. They didn't have the sufficient measure of
guarantee. They required.
i
C C Gisiger - Finanz und Wirtschaft, 2016

Answer to the question no: 5

According to “The Guardian”, the guy name Fuld who ran the Lehman Brothers for 14 years before the
bank collapsed. The man nicknamed “The Gorilla” was repeatedly blame the government and the
regulators behind their massive decline.

From the case study we can see that, the time from when Lehman Brothers Bank got into the circles of
the functions which led them to bankruptcy after few years, “boom of real estate business” was one of
them. At that time, government was too much eager to flourish the real estate market industry at a
prime level. And this real estate business is totally dependent on bank loans, that is why in 2003-2004
they went for Alt-A loans so that they can be the prime destination for the Real estate business groups
for taking loans, which indicates the increase of NPL or the non-performing loan. According to the
functions and characteristics pf non- performing loans or bad debts, the increase in the non-performing
loan decreases the interest income, alongside reducing the profitability & finally, as the asset
size increases so do the bad management shows up as there are huge operations to be handled by
the bank, therefore obstructing the profitability.

From Bangladeshi banking sector perspective during this pandemic of Covid-19, this NPL is pushed up
by the government itself, because the government is trying to swim up this covid-19 pandemic flood.
According to another research, the banking sector saw a BDT 18.2 billion fall in default credits and a
9% NPL in Mar'20 as Bangladesh Bank suspended detailing of default credits from January to help
organizations tide over the Covid-19 pandemic.

On July 3, Bangladesh Bank requested banks to dispense all the upgrade assets inside Admirable. Such
constrained dispensing of advances without a credit ensure is probably going to have negative
repercussions for resource quality and further increment NPL hazard for banks. However, The COVID-
19 pandemic has caused a historic fall in the no-operating income of banks due to nosedive in LC
opening and remittances. Also, tight liquidity scenario for governments high borrowing rate from the
banking sector and the lack of credit guaranty.

This is how regulators and the government are causing a severe declining situation in the banking
sector of our country which is similar to the Lehman Brothers.
Now the part is about how can the banks of our country rise from the crisis created by the covid-19.
The roles can be,

 in this critical situation, banks and different NBFIs must take due planning to quicken monetary
recuperation in the post-Coronavirus circumstance where the board and top administration have
basic task to carry out. Emergency readiness would be a vital aspect for bring soundness. A
watch gathering ought to be framed for information surveying and prepare the bank and NBFIs
for setting up a dependable situational examination when required. Procedures should be
announced unmistakably so all labor forces guarantee planning themselves as successful just as
effective at this stage for harm control.
 Should start to talk about start the immigration process so they can avoid the lack of remittance
pressure.
 Post pandemic situation should put high concentration on strengthening the asset quality, high
capitalization and try to invest highly on digital banking or other sources.

Reference:

[https://www.arx.cfa/-/media/regional/arx/post-pdf/2020/07/11/at-capital Bangladesh-banking-sector
report.ashx?la=en&hash=1EC1487BDA3DAD98B7BB963126441A541915F388]