Alternative: The need to change the lending policies of the bank
The difficulties faced by Landsbanki can be explained by the fact that this financial institution had very inefficient lending policies. In particular, this bank gave capital to organizations and individuals who were the main shareholders of the bank. In many cases, the managers could not determine whether these borrowers could repay these loans. Secondly, senior managers of the Landsbanki were willing to derive additional revenues by giving credit to companies who needed to repay their loans to other bank. The key issue is that these companies could not borrow money from any other bank.
Therefore, one could assume that their financial position was rather unstable. However, Landsbanki accepted this risk. Thus, one can argue that the bank should change its lending policies. In particular, it is necessary to change their lending policies. They should identify the standards which potential borrowers should meet. For example, one should speak about flawless credit history and availability of assets that can be used as the collateral.
These borrowers can be based in Iceland and abroad, but in each case, they should meet strict eligibility criteria. The main advantage of this policy is that the bank can minimize potential losses that can result from defaults on payment. Secondly, this approach can be useful for showing to the potential investors that the bank can adopt responsible risk management policies. The main disadvantage is that the number of such borrowers is very limited.
Other alternatives and their evaluation
There are other alternatives that should be examined. In particular, Landsbanki should not use equity securities as the collateral because the value of these assets can fluctuate significantly. To a great extent, this policy is beneficial for minimizing these risks. However, it improves only a part of the lending policies. However, it is not fully sufficient for minimizing potential risks.
Another alternative is related to leadership and HR policies. In the past, Landsbanki could often hire people whose educational background was not related to banking and finance. Therefore, it is vital to recruit those professional who have proven knowledge and skills. Overall, this step can also bring certain benefits because a team of highly-skilled employees can better identify potential risks. However, the bank will need to incur considerable expenses related to the recruitment. This is one of the difficulties that should be considered. Nevertheless, despite this disadvantage, this policy has to be adopted by the management.
Furthermore, the bank should focus on its operations within Iceland. It should be noted that Icelandic banks may not be able to operate in foreign countries such as the United Kingdom because its government froze the assets of Icelandic financial institutions. Furthermore, this organization may not fully control the activities of its foreign partners. This argument is particularly relevant if one speaks about the borrowers.
The main positive side of this strategy is that the bank will reduce the possibility of losses. Nevertheless, the organization may not be able to invest capital into those enterprises that can be sound from financial and organizational viewpoints. This is one of the disadvantages that should be recognized. Again, it is more vital to scrutinize the financial situation of borrowers. For instance, they should explain why they could not receive loans from other banks.
Additionally, other students focus on such a dubious practice as cross-holding or investing in the stocks of other banks. Their suggestion is to eliminate this practice because it misleads investors. This initiative can be supported; however, it does not directly improve the risk management policies of this bank.
Recommendations
Overall, the problems encountered by this bank can largely be explained by flawed risk management policies of this organization. The proposed recommendations are supposed to eliminate these deficiencies. The management of this financial institution should consider the following policies:
- At first, the bank should not cooperate with those foreign lenders who could be denied credit in other European bankers. This argument can be particularly relevant about those organizations that want to repay their debts that they already have already incurred. These borrowers are very likely to default on their payments. The bank should not end its relations with other foreign partners. However, the main duty of the senior management is to work with those businesses that are stable from a financial viewpoint. This is one of the policies that should be adopted by the management in order to strengthen the sustainability of this financial institution.
- Furthermore, the company should identify the eligibility requirements that potential borrowers should meet. In particular, these individuals and organizations demonstrate the ability to repay the loan. This safeguard is critical for minimizing potential losses. Furthermore, this policy is important for strengthening the confidence of investors who may want to deposit their assets to this bank.
- As it has been suggested by students, the CEO of this financial institution should concentrate on the recruitment of the professionals whose educational background is related to banking. They are more knowledgeable about the work of financial institutions. Moreover, these people can better recognize potential threats and avert them. Admittedly, it may be necessary to spend additional costs on hiring new employees; nevertheless, these expenses can be justified, at least in the long term.
- Finally, the management should eliminate such a practice as cross-holding. This practice is misleading and deceptive because it contributes to the artificial rise in the price of stocks. Nevertheless, it can increase the concerns of many investors, and they may decide that the bank tries to misrepresent the results of its financial performance. Many of them may decide not to invest their money in the bank. This is one of the pitfalls that should be avoided by the management; otherwise the bank may not strengthen its sustainability.
- Additionally, the management of this bank should increase the transparency of its policies in order to restore the trust of investors. In particular, this financial institution should inform the public about the risk management policies. This step is important for addressing the concerns of many investors who currently tend to distrust many Icelandic banks. This is why this recommendation should not be overlooked by the management of this financial institution.
On the whole, these suggestions are supposed to achieve two important objectives. In particular, they are aimed at creating a system of checks and balances that can minimize the exposure of this bank to financial risks. Additionally, in this way, the senior management can demonstrate that a bank can develop and impellent sound policies. Therefore, one can change the attitudes of customers and investors. These are the main details that can be distinguished.