Abstract
Financial institutions may use several methodologies to mitigate at least one type of especially pernicious operational risk: bad lending. Marshall includes bad lending in a list of potential catastrophic losses that can threaten the viability of a company.1 Not only did bad lending associated with subprime mortgages drive many lenders out of business, but also linkages through the securitization market threatened the viability of many global financial markets.
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Notes
Marshall’s list of potential catastrophic losses also includes rogue trading, insider fraud, poorly understood derivatives, poorly rolled-out new products, inadequate controls in emerging markets, counterparty failures, natural disasters, and snowballing reputational losses. See Christopher Marshall, Measuring and Managing Operational Risks in Financial Institutions: Tools, Techniques, and other Resources (Singapore: John Wiley & Sons, 2001), p. 75.
See Patrick de Fontnouvelle, Virginia Dejesus-Rueff, John S. Jordan, and Eric S. Rosengren, “Capital and Risk: New Evidence on Implications of Large Operational Losses,” Journal of Money, Credit, and Banking 38, no. 7 (2006), 1819–46.
Roland Gillet, Georges Hübner, and Séverine Plunus, “Operational Risk and Reputation in the Financial Industry,” Journal of Banking & Financ 34, no. 1 (2010), 224–35
The originate-to-sell business model also complicated regulation of subprime lending. Some mortgage originators would tend to abuse the securitization channel to hide shoddy originations. Michael Lewis’s book, The Big Short: Inside the Doomsday Machine (New York: W.W. Norton, 2010)
Clara Cardone-Riportella, Reyes Samaniego-Medina, and Antonio Trujillo-Ponce, “What Drives Bank Securitisation? The Spanish Experience,” Journal of Banking & Finance 34, no. 11 (2010), 2639–51
See Arthur J. Wilburn, Practical Statistical Sampling for Auditors (New York: Marcel Dekker, 1984).
See Min Qi and Xiaolong Yang, “Loss Given Default of High Loan-to-Value Residential Mortgages,” Journal of Banking & Finance 33, no. 5 (2009), 788–99
A study by Anno Stolper, “Regulation of Credit Rating Agencies,” Journal of Banking & Finance 33, no. 7 (2009), 1266–73
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© 2016 Douglas Robertson
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Robertson, D. (2016). Mortgage Mayhem. In: Managing Operational Risk. Palgrave Macmillan, New York. https://doi.org/10.1007/978-1-137-44217-8_3
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