HOW DID RISK MANAGEMENT METHODS CHANGE AFTER THE 2007 SUB-PRIME MORTGAGE CRISIS IN THE UNITED KINGDOM?

Abstract

The fundamental objective of this study is to find out the key lessons we need to learn from the risk management failures of the financial sectors during financial or Sub-Prime mortgage crises (2007-2008) in UK and US to prevent or dampening future crises magnitude. The literature collected from academic articles and summarising books about the cause, events, and effects of the financial crisis, written before, during or after the event, to be able to reach a critical analysis of the differences on the viewpoints expressed about it. Moreover, we conducted semi-structured and confidential interviews to investigate the failures of risk management that originated the global financial crises. The respondents of our interview-based study are the professional risk management executives of the United Kingdom from different financial institutions. The significant finding of this research is that the United Kingdom organisations get involved in Moral hazard practices because they knew that if anything bad happens, the government will rescue them. Furthermore, the cause of sub-prime mortgage crisis is the insufficiencies in risk management models, and the majority of risk models failed because of known unknowns. Other explanations of the study empirically stating that financial institutions remained failure to manage risk appropriately during a crisis. The study is also concluding some key lesson from the financial crisis including, to improve the risk cultures among banking sectors of UK, risk-seeking manners of short-term bonuses, too much rely on standard models like Value at Risk (VAR), and a more cautious approach implemented to sub-prime loan management than before the crises.