Title : ‘The current challenge facing global businesses

is unparalleled. That this crisis is one of ethical

mismanagement is unchallenged. But is it really a
case of the financial sector being at fault? Is it not
really a matter of the regulatory authorities in the
US and Europe – predominantly – failing in their
duty to consumers and business alike?’
Subject : Organizational Values and Business Ethics
(OVBE)

Semester : First

Programme : Masters of Business Administration (MBA)

Subject Tutor : Mr. Roland Bushell

Name of Student : Prajapati Bhavisha

Student ID : 9060021

Date of Submission : 5/08/09

Word Count : 2020 Words

Word Limit : 2000 Words

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 CHECKLIST
Name of student Prajapati Bhavisha

Student ID 9060021

Date for submission of the Assignment. 5/08/2009

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 TABLE OF CONTENTS
Contents Page

Introduction 4

Credit Crunch Origin 5

Business Ethics 6

Financial Sector Ethics 7

U.S and Europe Financial Regulations 8

Regulations in Banking Sector 10

History’s Biggest Global Credit Crisis – Who to 11

Blame?

Conclusion 12

13
References

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INTRODUCTION

Global business means business across national border lines. It has become

a common trend within an industry, for any company to spread it globally.

Stakeholders and shareholders play the main role in any business. Stakeholders

may be internal - owners, managers, employees or external - customers,

suppliers, banks, etc. When stakeholders interest with the business decreases

along with economic quakes and they are not willing to support the business with

their respective responsibility, leads to crunches in the business. The main

business crunch observed in terms of financial crisis, famously known as credit

crunch. One of the reasons of credit crunch may be lending policies adopted by

financial institutes and the much debated government policies. Primarily

businesses are funded by banks on the basis of the business capital. Sometimes

banks become too strict in lending money to businesses and even if they lend, the

interest rates are very high, this leads to businesses slow down globally, which

leads to global credit crunch. World is currently undergoing with this problem of

global credit crunch which came into existence in 2007 and is still going on.

There are various reasons for today’s financial crunch and many are to be

blamed. Due to this economic crunch who is suffering the most is the common

man.

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 CREDIT CRUNCH ORIGIN

Some time back people were not aware of the term credit crunch but now

even a small kid is aware about the term due to its very popularity. Basically

financial crisis are caused by extremes – mainly monetary excesses which then

lead to additions of all and finally it bursts (Taylor, 2009).

An Exemplary Credit Crisis: The Basic Template

Excessive Liquidity Excessive Lending Excessive Leverage Excessive Risk taking

Tremendous Spread tightening Credit Bubble

Burst of the bubble

First order effects: Direct credit link losses (investments)

Second Round Effects: Spillover effects onto other financial market segments

Third Round Effect: Spillover effects onto real economy

(Felsenheimer & Gisdakis)

The first step towards origin of credit crunch is supplying liquids vastly;

may be by investors or by banks. Lending money with low interest rate is very

impressive phase for common public; which leads to excessive leverage. Excessive

leverage is associated with high risk taking and very tight credit spread. This

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leads to creation of credit bubble which causes occurrence of fundamental

dislocation. Finally the credit bubble burst and then the rapid impacts are

observed in the local market or common public.

The credit crunch of 1966 was the first credit crunch in post war. It came

into existence because banks were prevented from giving funds to business world.

While the latest is the current credit crunch which had started showing its spread

since 2007 and is still ongoing even today (Wolfson). It had initially started from

2004 but major impacts were observed in 2007.Due to credit crunch and

recession the major affected areas are employment, development of new

products, demand of goods and services as well as ethics of an individual and

business. The current crisis has now not only been into the business industry but

has become the front page news for newspapers.

BUSINESS ETHICS

Business ethics can be defined as driving principles for working, acting and

decision making in the business environment. In other words business ethics

means principles that differentiate between correct and incorrect. Unethical

business behavior can be easily known and it is also an offense in eyes of laws.

Businesses should work ethically as they have great impact on people’s lives. They

are also responsible for increase or decrease of economic conditions of a country.

Many a times working ethically and serving the interest of public; leads business

to losses or reduction in growth of a business but then also it needs to work

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ethically. Working ethically will lead business to a greater height and confidence

of people involved; it will also lead them to customer loyalty which in turn will

raise the profits of the business (Anon).

Business ethics are also associated with credit crunch. According to Andrew

Neil (Former Sunday Times Editor), now business needs to reintroduce ethics, as

ethics have lost their identity in businesses. It is very well known that human

beings can change into violent creatures if there were no rules laid down. To

encourage ethical behavior corporate sectors should reduce the pressure laid by

them in the marketplace.

FINANCIAL SECTOR ETHICS

Financial system narrates the economic conditions of a country and is also a

basis for financial market. Financial markets can be divided into money markets

and capital markets on the basis of their useage.Money markets are short term

trading while capital markets are long term trading. Financial sectors are

generally regarded as the governing areas for all industries. As all business need

to follow certain ethics so does the financial sector. There are two main ethical

principles associated with financial services –

1) Avoid deception and fraud

2) Honor your commitments

(Hartman & Chatterjee, 2007)

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 Today the role of ethics in the financial society is limited to its role in

financial-economic theory. The obvious fact for motivating human behavior is by

maximizing personal wealth, this have deviated financial ethics a lot. In today’s

scenario of financial crunches, banks have hugely reduced their lending as they

are uncertain about the reserves they have. This has resulted into less lending

and credits to common people. Many people link present credit crunch to

mortgage business, wherein US banks gave high risk loans to people with no

conditions of repayment.

U.S AND EUROPE FINANCIAL REGULATIONS

Services are major factors affecting the economic sector in most developed

countries. Agriculture is the least affecting factor on country’s economy while

industry affects moderately. US economy is the largest and most important

economical market in the world. US consumers are mainly the driving force for

the economy in the country. US government plays a vital role in development of

the economic conditions of country as they use economic gadgets like money

supply, tax rates, and credit control to overcome the economic conditions.

According to the US president Mr. Obama the economic downturn of the

country was mainly due to financial institutes , lack of advocate rules in the

regulatory system and even cultural liability have played a role in recent credit

crisis. Financial innovators had produced many financial gadgets like “asset

based security” which had many varieties but were very complex to understand

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with hidden terms and conditions. Basically these gadgets were developed to

spread risk but they turned out in concentrating risk. Banks were given loans by

financial investors and this huge money spread among the common people at

easy terms and conditions; due to which many Americans bought home by

borrowing money as it was easy money. Market was every time increasing the

risk rather than releasing it. Finally debts went too high and capital was going

down day-by-day. Major impacts were seen on those Americans who did their

jobs sincerely and had their dreams to be fulfilled. Overall it was not the failure of

an individual but the failure of entire system as it is responsibility of the

government. Now it is high time to take actions to overcome the highest credit

crunch in a very systematic way with clear roles of rules. Innovations in industry,

fast education systems, new jobs, energy economy, and strong vibrant market

should be targeted with transparent, administrative rules that protect US

consumers. By doing this we will come up with longer and broader views which

will protect us from facing the next credit crunch (Obama, 2009).

According to Mr. Woolmer, the G20 – which form the major part of the

world, should also review their regulatory system after viewing current financial

crisis. Four regulatory proposals have been published by EU commission -

Capital Requirements, Deposit Guarantee Schemes, Credit Rating Agencies and

Alternative Investment Funds (Woolmer, 2009). All the proposals and actions

taken by the EU regulatory should keep in mind the global aspect. New bodies

should be created to monitor and provide ideas for systematic financial risk

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across the globe in financial market.UK government varies a little bit from the EU

thinking and needs to make it more clearer and transparent, as they are more

strategic in vision.EU need to set up new rules with the global environment as the

main focus (European Union Committee-Fourteenth report, The Future of EU

financial regulation and supervision, 9th June 2009).

REGULATIONS IN BANKING SECTOR

Banking rules varies not only from country to country but even within the

country among different banks. Failure of regulators to regulate the system is one

of the reasons for current financial crisis. Financial products like home loans,

student loans were sold easily by banks as it came as easy money from investors.

This easy money busted the balloon of credit crisis and now globally we are facing

the highest ever in history the credit crunch problems. Now it’s high time for

governments to act, they need to promote laws for banking. Such as nationally all

banks need to have same standardized terms by laws that is if any person wants

to take a loan then he can pick up the information regarding it from any bank as

all banks have the same terms and conditions. Same should be applied for credit

cards, contracts, and all financial products. Security items like lending money to

someone should also have some strict guiding rules. However payment

settlement should also be governed with rules as today we find lot of people who

cannot afford to take loans but are taking loans though they know that they are

not in a condition to repay it back. Any financial idea – buying, selling,

promoting, advertising, dealing should be entitled with legal laws. Finally all

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credit providers should be regulated as they are the major source of influence in

the financial market(Peters,2009).Overall a good ethical culture should be

developed in the financial sector mainly into the banking sector where day-to-day

transactions takes place. This will led to more systematic and controlled

administrative environment which will be in favor of all.

HISTORY’S BIGGEST GLOBAL CREDIT CRISIS -

WHO TO BLAME?

Current global crises have made such impacts on the global market wherein

each and every individual is forced to think for a solution. But to get a solution we

also need to known the roots of problem. Few personalities say it is the fault of

banks – in past few years, banks were very generous in lending money to people

with various liberal strategies on mortgages. Currently in US many people have

their own house but they do not have enough funds to repay back their

mortgages. It is not only the fault of US banks but also their counterparts existing

in UK, Europe or across the globe. Overall the whole banking system is

responsible as they were overconfident about the whole innovative financial

system which affected the global capital market. Few people also blame

consumers or customers equally responsible for current crises – such a scenario

of global crises would not have occurred if customers were wise enough not to

take advantage of mortgages offered; for which they knew that they would not be

able to repay back. However every few people blame customers as banks were

doing hard-core selling of their financial products. Moreover the supreme power

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- Government are also at fault. They never questioned banks on acting

irresponsibly in order to maintain the regulatory system (Pettinger). Basically it

is very easy to blame anyone may be in personal or political context. The US

President Mr. Obama says during a news conference ahead of the G20 summit

that “he is more interested in looking for future rather than talking about how the

global crisis came into existence”(Obama, 2009).

CONCULSION

Concluding, business ethics, financial sectors, regulatory authorities,

banks, customers all are involved into the present economic crisis but the major

common denominator who always supported all areas of concerns was regulator’s

failure to notice, and effective policies on the part of government regulating

bodies. Unless genuine efforts are not made to handle this problem we may not

come to the end of this global economic crisis though people say that crisis have

started falling.

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REFERNCES

Anon, ‘Credit Crunch, Bank Lending, and Monetary Policy: A Model of Financial
Intermediation with Heterogeneous Projects’, (August 2003), Available on
http://whitepapers.silicon.com/0,39024759,60017588p,00.htm [Accessed on
31st July 2009]

Anon,’ Timeline: credit crunch to downturn’, (11 June 2009), Available on

http://news.bbc.co.uk/1/hi/business/7521250.stm [Accessed on 31st July 2009]

Anon, ‘Business ethics and corporate social responsibility’, Available on

http://www.times100.com/, [Accessed on 31st July 2009]

Anon, Available on http://www.economywatch.com/world_economy/usa/

[Accessed on 1st August 2009]

Dobson.John,’The Role of Ethics in Finance’, (1993), Available on

http://www.jstor.org/pss/4479699 [Accessed on 31st July 2009]

European Union Committee-Fourteenth report, The Future of EU financial

regulation and supervision (9th June 2009), Available on
http://www.publications.parliament.uk/pa/ld200809/ldselect/ldeucom/106/10
602.htm [Accessed on 1st August 2009]

Felsenheimer.J and Gisdakis.P, Credit Crises, Available on

http://books.google.co.uk/books?
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mer,+Philip+Gisdakis#v=onepage&q=&f=false [Accessed on 31st July 2009]

Hartman.L.P, Chatterjee.A (2007), Perspectives in Business Ethics (3rd Edition),

New Delhi, Tata McGraw-Hill Publishing Company Limited.

Neil. Andrew, ‘The ethics crunch?’ (24 November 2008), Available on

http://www.inthenews.co.uk/news/features/in-depth/the-ethics-crunch--
$1250821.htm [Accessed on 31st July 2009]

Obama.Barack, (1st April 2009), Available on

http://news.bbc.co.uk/1/hi/business/7977005.stm [Accessed on 2nd August
2009

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Obama.Barack, (17th June 2009), Available on http://www.youtube.com/watch?
v=CHpnfif8MfI [Accessed on 1st August 2009]

Peters.Michael, (17th June 2009), Available on http://www.youtube.com/watch?

v=qnuOZU-q93o [Accessed on 1st August 2009]

Pettinger.T, Available on http://www.economicshelp.org/2008/08/who-is-to-

blame-for-credit-crunch.html [Accessed on 2nd August 2009]

Saj2008,’Different Stakeholders’, (11/17/2008), Available on

http://www.allfreeessays.com/essays/Different-Stakeholders/9074.html
[Accessed on 31st July 2009]

Taylor.B. John, ‘WSJ: How Government Created the Financial Crisis’, (9th
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