Strategic Management

Satisfactory Essays
By reference to strategic management literature, discuss the extent to which events associated with the ‘credit crunch’ and banking crisis of 2008 have witnessed a fundamental re-appraisal of banks’ and building societies’ organisational purpose and corporate governance. In the previous 10 months, there has been a worldwide credit crunch which has affected every individual and organisation. A good definition of credit crunch would be one provided by Simon Nixon (2008), “The credit crunch started in August 2007. The term refers to the sudden contraction of credit across the financial system as banks became increasingly reluctant to lend. It has left individuals and companies facing potentially higher interest costs, or struggling to get access at all.” The credit crunch can occur for several reasons such as; “sudden increase in interest rates, direct money controls by the government or drying up of funding the capital market”, ( According to the Times Online, “years of lending increased a huge debt bubble; people were borrowing ‘cheap money” and properties. The crunch began in summer 2007, where lending to low-income Americans opened a wave of financial problems. As a result banks were not lending money to consumers and one another. Furthermore, it became a worldwide phenomenon; “the way the debt was sold on to investors gave the crisis global significance. The US banking sector package sub-prime home loans into mortgage-backed securities known as CDOs (collateralised debt obligations). These were sold on to hedge funds and investment banks who decided they were a great way to generate high returns (and big bonuses for the oh-so-clever bankers that bought them). When borrowers started to default on their loans, the value of these investments plummeted resulting in huge losses for banks globally”, ( As this was going on, consumers felt the effect of basic necessities prices increasing. Some of the problems which have occurred from the credit crunch are: Shortage of loans- There has been a decline from banks in lending money to consumers. “In the UK, mortgage approvals have fallen to the lowest levels since records began. This shortage of consumer loans is causing; falling demand for houses and falling prices, falling consumer confidence as people struggle to be able to borrow and declining profitability for banks and declining share values”, ( Tighter credit stands- “The shortage of credit is causing banks to increase the cost of mortgage products. The gap between base rates and bank rates has increased as the banks seek to increase the profitability of their loans.
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