Question

Summary of the issue of common business practices and their impact on risk within an organization. Summary to include at least one reference.

Answer 1

We can take reference of the banks most particularly investment bank like Lehman brothers.

Their common business practice is to securitize the mortgage loans of some mortgage banks but the valuation of properties done by them was a bit higher than its peers . As the housing market fell, it's mortgage loan valuation was high but properties real or actual prices were far low than what they were valued. Suddenly these small mortgage banks failed because of gap in the valuation which finally led to the collapse of this giant investment bank "Lekin Brothers".

So business practice of valuing property higher cause a serious risk to these mortgage banks. The default risk by the borrowers of housing loan increases due to such high valuation of their properties by the bank , it is because as the prices in realty sector declines, borrowers starts defaulting in payment of such high loans forbthe property whose actual value is less.

Nowadaya, banks are more strict in valuing the properties and makes appropriate provision at the time of giving loan itself for any such turmoil . Thus, their exposure to risk csn can be reduce in such a way.