Why do you think so many banks failed to properly manage risk prior to the financial collapse?

Credit risk management | Nursing homework help

Many banks did not manage risks properly prior to the financial crash due to several factors. They were too optimistic that the investments they made would not be affected by a recession. To maximize profits, the banks were forced to accept more risk. Some banks also failed to account or recognize the elevated risk levels associated with some types of investments, such as derivatives and subprime-mortgage-backed securities. Even experienced bankers found it difficult to understand these products and their lack of knowledge caused them to undervalue the risks involved with the investments.

Moreover, senior managers were not able to monitor excessive risk taking by investment banks because many of them did not use adequate procedures or systems for measuring and managing risks. Banks often use complex financial instruments which make it harder for both regulators and audits to spot potential issues before they become too serious.

The financial crisis was also triggered by a banking culture that was focused on short term profits rather than long-term stability. This encouraged irresponsible behavior among both lenders and investors. 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