Financial Regulation & Supervision. Andrews Bank case study - Essay Example

?Financial Regulation & Supervision Introduction Regulation and supervision in the financial sector is one of the most studied and evaluated elements. In the past years, the world has witnessed several issues and problems related to lax regulation and supervision in the financial arena. This has led to the conundrum of liquidity and financial crisis. As a result, more stringent rules and regulations have been composed and enacted over the time period. In this day and age, when competition is fierce and opportunities are far and few between; cost levels are rising and people have expenses to meet; it becomes difficult for individuals to focus on ethical concerns and work in accordance with ethical principles. We have several cases in point which have been part of the news where employees have crossed ethical and in some cases legal boundaries to make economic gains. In that respect, the following case analysis is an example of how financial regulation and supervision is important and needs to be implemented in order to keep employees within the realms of ethical and legal boundaries (Schooner & Taylor 2010). Summary of the Case Adam is a newly hired commercial loan officer in training at the Andrew and Andrews Bank. After clearing several credit analysis exams, he joined the bank with zeal and fervor towards credit analysis. Several of his seniors noticed him for his intelligence and smartness. Soon Adam was promoted to be a financial analyst and was assigned to his superior, Jon Smith who was a commercial loan officer. As part of his job, Adam was required to conduct credit analysis to check credit worthiness for all new customers that Jon brought into the bank. In one such case, where Roberts and Roberts had requested for a five million pound loan, Adam was extremely confused by the way Jon had handled the situation. Adam noted that the company, a retail store chain, was very highly leveraged with most of the exposure being handled by his bank. In most of the cases, Roberts and Roberts had undertaken operating leases which were not part of the long term loans like other leases. As an accounting regulation, finance leases are classified as long term loans while operating leases only come under contingencies and commitments and in the notes. As a result, Roberts and Roberts was playing with accounting rules and noting its operating leases under notes. Subsequently, when Adam analyzed the credit worthiness of the company, he found that the company was dangerously over leveraged and therefore was not a safe investment or customer for the bank. Adam included this element into his analysis in the memorandum which he then forwarded to Jon so that she would include that in the credit file. However, Jon decided not to include that in her credit file and the file was later approved by the credit committee with the operating lease issue never coming up in the credit committee meeting. After this scenario, Adam overheard a conversation between Jon and other colleagues. Apparently, Jon had a personal mortgage loan application approved by the Sheffield Building Society. It was also found that the President of Roberts and Roberts was also chairing the board of the society. Adam also found that extremely favorable rates were offered to Jon on the personal mortgage. Adam was thoroughly confused because of the unfolding scenario and this case now portrays several ethical concerns. Following this is an outline of the ethical concerns that are raised by this case along with the action steps that Adam should take in order to fix the situation. Moreover, certain recommendations for the organization are also put up in order to avoid such situations in the future. Ethical Concerns Highlighted in the Case Various ethical concerns have been highlighted in the case based on the scenario outlined above. The first issue that has come up is that Jon has been given the sole responsibility to present the credit file to his superiors and the credit committee which leads to issues such as dependency on only one person who can be easily influenced in certain situations. We see this has happened in the case as well when Jon’s ability to objectively analyze the credit worthiness has been compromised based on his mortgage loan application that has been in processing in the organization whose chairman is the same as the president of the credit being evaluated. Another ethical concern that has been highlighted by the case is that Adam has not taken any action on the ethical situation that has taken place on the credit file that was evaluated. This ethical concern should be considered more serious than the one that Jon has raised. The reason for this criticality is that Adam should have highlighted the credit issue in the credit committee if Jon had decided to skip on this particular scenario during the credit meeting. This is a clear case of negligence on his part as he knew about the increased credit risk but did not take any action in favor of the bank. The third ethical concern that has arisen is on the part of the credit committee which evaluated the case based on subjective opinions from only one person, Jon. When credit analysis and evaluation should be based on multiple objective views, the credit committee failed to conduct a fair view which in turn compromises the credit worthiness of the bank and in turn risks the deposits in the bank as well. The fourth ethical concern that can be noticed in this case is that the President of Roberts and Roberts compromised on the credibility of his organization and of the board when he approved the mortgage for Jon at lower than regular rates because Jon was offering them loans by compromising on the quality of credit analysis which was presented to the credit committee. In some circumstances, this issue might be illegal as well depending on the rules and regulations being followed. Problems Arising out of Unethical Behavior Several problems can arise out of the unethical practices that have been conducted in Andrew and Andrews Bank, and in Roberts and Roberts. The first and foremost problem that has arisen is that the credit worthiness of the company, Roberts and Roberts has been compromised. As a result, the riskiness of the company has increased since further loans are to be disbursed to the organization. This creates a volatile situation for the bank as well since the bank’s credibility and worthiness has been compromised as well. The riskiness of the bank increases as it has taken exposure on a highly risky credit. In addition, this riskiness reflects on the deposits of the bank’s customers as well since the bank has taken a high risk exposure on itself thus compromising on the deposits of its customers. The ethical concerns within the bank and within the retail store should be managed in order to rectify and avoid such future issues. Following are recommendations based on individual and organizational basis that need to be taken into account in order to regulate and supervise financial matters such as the credit evaluation mentioned in the case. Management of Ethical Concerns by Individuals Taking the case of Adam, it must be noted that Adam was in the right to point out a concern that was apparent in the credit case that he was analyzing. He pointed out his concern that Roberts and Roberts was highly leveraged and therefore, taking more exposure on this retail company would put the bank at risk as well. However, Adam failed to realize that his responsibility was not simply to point out this concern but also to raise this issue at a level where it would be heard and understood as well. Since Adam works for the organization and not for Jon, his loyalty is completely linked to the bank. As he did not raise this concern further in the hierarchy, it was his responsibility as well when the portfolio of the bank was compromised (Schooner & Taylor 2010). There are several steps that Adam should take to make sure his concerns are highlighted in the right manner. The first step was to inform his immediate supervisor of his concern that Roberts and Roberts was a high risk investment and therefore, should be avoided. The next step he should have undertaken, when he realized that Jon was simply going to ignore Adam’s recommendation, was to immediately disassociate himself from the credit package that was prepared for the credit committee and which was compromised with respect to complete disclosure and evaluation (Schooner & Taylor 2010). If disassociation from the package did not raise the right level of concern within the management, the next step to undertake was to raise the point of concern, which is lack of objectivity in the credit file, to the higher management before the final decision was to be taken on the credit. At this point, if the management does not take any level of concern to the risk that the bank is undertaking, then Adam should disassociate himself from the position and the credit file completely since all avenues to raise the concern have been exhausted. In dire circumstances, it may be recommended that the employee leave his or her position in order not to compromise on the quality of their credit analysis and their work (Schooner & Taylor 2010). The above steps outlined are for when Adam did not know about the personal mortgage application that Jon had filed with the Sheffield Building Society. In case if Adam had not followed the process explained above, the final choice after finding out about the mortgage application was to explain to his superiors about the compromise that has taken place as a result of Jon’s personal motivation behind the loan application presented by Robert and Robert. In dire circumstances, the best choice scenario for an employee would be undertake a whistleblowing approach towards the problem in order to avoid scenarios where a choice would have to be made between the supervisor and the organization. Adam should then follow the whistleblowing process that his organization has and should report the situation of a compromised credit to his superiors (Schooner & Taylor 2010). Recommendations for Corporate Governance The section earlier elucidated on how as an individual, Adam should have highlighted the ethical concerns that were raised because quality of credit analysis was compromised by Jon as he was motivated for personal gains. This section aims to analyze the various steps that the organization should take in order to avoid such similar situations and to strengthen corporate governance within the organization (Schooner & Taylor 2010). The first and foremost step that the organization should take is to include objective analysis into its credit files which would mean including more than one person who is evaluating the credit package. With more than one person analyzing the credit file, chances of losing objectivity while working on financial analysis will be reduced. Further on, dependency on one person being correct and objective on the credit analysis would be reduced as well. As a result, when the credit package is analyzed during the credit committee meeting, then it becomes easier for the committee to take the right decision through complete disclosure and information as well (Schooner & Taylor 2010). The second step that the bank should undertake is to make sure that the standards for personal and professional conduct are highlighted and all people within the organization are following those policies and procedures in order to ensure objectivity and to avoid such serious ethical concerns. In this situation, the organization should create procedures and policies where Jon is eligible to disclose his personal involvement with respect to his personal loan application that is pending with the Sheffield Building Society while the credit package is under evaluation. In that scenario, the procedure should outline that Jon be disassociated from the credit evaluation as his objectivity to give a credible evaluation to the credit package may be compromised (Schooner & Taylor 2010). In addition, the bank should also outline procedures where people who have an objective opinion and who have an idea of the unethical practice that may be taking place, should be able to effectively voice their concerns and help rectify the problem before it occurs (Schooner & Taylor 2010). Conclusion The above case evaluation along with its ethical concerns identifies a situation that happens on a regular basis in many organizations and not simply banks as well. In such circumstances, the organization should be equipped to handle the complaint or problem at hand, and should also have such procedures outlined that would help it to avoid such circumstances to arise in the future. We see that the credit evaluation was comprised because of personal gains and as a result, the bank can suffer huge consequences, if Robert and Robert fails to materialize as a good credit. This situation can easily be avoided if the organization has good corporate governance practices in place where employees have a fair share in being able to rectify ethical concerns at hand before they tend to escalate as it did in the case of Andrew and Andrews Bank. Organizations simply need ot evaluate the various possibilities where ethical concerns can be raised, and then outline various policies that will help people to rectify situations where applicable and to avoid situations where necessary. Since the case does not provide us with complete information on how the situation was handled or whether any corporate governance practices were in place within the organization, we can safely outline several guidelines which Andrew and Andrews Bank can implement in order to avoid such circumstances from arising in the future. References: Schooner, HM & Taylor, M 2010, “Global Bank Regulation; Principles and Polices”, Dawson Books. Read More