Introduction
The investment market has been affected by economic crisis. This has led to the occurrence of many unavoidable losses. This has mainly occurred in banks where many loan borrowers have problem in paying back their debts forcing the bank to sell the security at loss. These specific problems faced by banks have been discussed in details in this paper. These market conditions have made investors to engage in leveraging.
Discussion
The property yields were not sustainable as per the evidence due to many contributing factors. These factors are majorly contributed by the wider economic and regulatory pressures on banks. “This has led to the bringing of changes to the investment market where most banks are forced to recruit new management teams as the older ones are considered as failures and cannot be trusted anymore” (Rosenberg 2007,p12).
Due to these pressures, many lenders have been forced to look at their property loan books and take crucial actions. Many of the banks suffered losses since the price of the property assigned for the debt by the borrower begun to decline with falling market rates and raising vacancy rates. “This occurs when the selling of the property is far much lower than the cost of the capital the bank needs to set aside in order to hold it” (Chew 2006,p34).
The property laid as security loses its value with time and therefore the bank might need to spend to improve its value before selling it. It is this main reason that banks are forced to take action before the situation becomes unbearable. “The actions taken by banks include calling default on loans, restructuring debt and replacing staff members” (Byrd 2003, p9). Furthermore, it is very difficult for banks to take full control of the property laid as security leaving the existing borrower out.
Apart from the economic and regulatory pressures on banks, the bank itself has contributed to the negative results produced in the investment market. “This is where some banks have the loans restructured with higher fees and extending them for the targeted companies which are believed to have better properties with good cash flow” (Graham 2004,p34). These banks claim that they need an increase in the fees since the cost of their own funding has increased drastically. “Lenders have complained over this decision made by many banks” (Chesbrough 2007, p66). They point out that, by banks restructuring the loans and extending them does not cover their higher cost of funding and furthermore means more regulatory capital to be put aside.
The banks have taken a step of recruiting new management teams to replace the other ones since they expect them to bring some equity to deals by working in unity. “Many banks see this as the best way to avoid great losses. They do this by laying new strict rules concerning handling of the borrowers and the properties laid as security” (Freeman 2008, p12). If the new staff is structured well banks can drastically reduce debt on property, reduce their property exposure and also avoid potential future losses.
Another issue in this topic facing the bank is the issue of matched funding where it should be considered that banks also have their own refinancing needs to deal with as well as the borrowers. “Although in some cases there is mismatch and in this case the bank cannot provide new debt to the borrower despite the urge” (Ghosh 2003, p87). The banks have not been able to borrow from one another since they are still preserving capital to protect against potential loan losses. Another issue is the where the loans are sliced up and sold to the bond investors. “For such loans to be refinanced, a bank with an interest to take on new exposure to commercial property has to be found” (Miles 2004, p32).
In the second topic, the market conditions discussed here are the economic crisis facing the world today. This problem has been a challenge to the market or business sector. “This has forced the investors to engage in leveraging where they look for a technique to multiply gains and can also be of multiply losses” (Chakravorti 2009,p55). There are several ways to attain leverage that is practiced by many investors. Most of these ways are practiced with an aim of bringing gains and help in the economic recovery process in majority of the global market. Like many international banks have discovered new techniques to handle commercial property.
For example, the international banks and investors in bank bonds will pay to buy insurance against a bank default, credit default swap, at a lower cost. “Thus the lower cost of this credit default swap, the better perception is for the health of the bank” (Luecke 2003, p90). The improvement in the market condition has also led to reduced pressure for the bank to act upon the securities placed by the borrowers.
Conclusion
This paper has discussed the problems faced by banks in the investment market. It describes how banks suffer losses after a borrower fails to pay back the debt having placed security. It explains that these losses happen since the value of the property deteriorates with time and thus reaches an extent where it’s worth is far much less than the debt. This paper has also commented on how the market conditions has forced the investors engage on leverage.
Reference list
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