Dec 4, 2008
With regards to being prepared or not, well we all know that everything has a risk. But of course compared to other investment forms, we know that banking so far is the safest haven, at least relatively. And commercial bank more than rural since the former is more stable, again relatively. (safest? - well, we could opt to put our money under our mattresses, but is it really an alternative, seriously?)
Since we are trying to point out if this is a hoax or a truth (first we must come up with the name) or at the most, predict what might be possible by comparing it to the fate of some known firms that have gone bankrupt like Lehman brothers and AIG, we must also acknowledge the difference among them.
Well, I’m not really an expert because my profession is FAAAAR from banking and finance or accounting (in fact it’s the opposite, as I think it’s more of a charity!), but I will try to contribute. Sana tama ang karamihan sa sasabihin ko.
Commercial banks are different from Investment banks. And Lehman Brothers, AIG, Bear Sterns, Washington Mutual, etc etc. fall under the latter.
Commercial banks are engaged in raising funds, though deposits (TD, savings) from corporations to individuals which they try to profit from by loaning this to businesses and consumers in place of a collateral or a lien to the title of the house if it’s a housing loan (which secures them by the way, should the borrower fails to default on the loan), or buy corporate and government bonds. In terms of mortgage loan, they either directly provide the loan – if you get approved, given a tight lending policy - or acquire these mortgages from simply purchasing it from mortgage bankers or institutions.
Investment banks on the other hand, profit from companies, governments and individuals investors by issuing and selling securities in the capital markets (equities and bonds), as well as offering advisory services for mergers and acquisition or trading for clients and underwriting securities.
In the past years however, investment banks have expanded on providing financial services such as a mortgage loan. In the case of the subprime crisis, they provided such loans to people with poor credit rating (or those who are likely to default payment, when hindsight should be 20/20?
)-which I don’t think would be given by commercial banks, by the way - made a security out of these loans then sold them to investors. With subprime foreclosures, come a vicious cycle of increasing debt, loss of confidence, withdrawals of investment, eventually bankruptcy. 
Not really sure about Philippine laws that govern the activities of these two types of banks. But in other countries, it is ruled that commercial banks should be engaged only in banking activities and investment banks with investment activities. But it is not necessary that they should be a separate company. That is the reason why commercials banks have their investment divisions.
My point, just because investment banks are deteriorating one after the other, commercial banks will ultimately follow. I mean, given the conservativeness of the latter in terms of revenue sources, not to mention the nature of their business, reasons for bankruptcy may fall under a different category, and not entirely because of the subprime mortgage crisis, unless of course they go beyond the confines of their industry.
But of course, like many other businesses, commercial banks may fall – poor macroeconmonic conditions, poor management, poor accounting – which all boils down to making bad decisions. In the case of risky investment, too much exposure than they can handle.
You are right, a risk no matter how small it is, is still a risk. Thus we must take coverage.
But getting unduly anxious over something we don’t understand is a different thing.
So to those who are more knowledgeable about banking, please enlighten us more.
With regards to being prepared or not, well we all know that everything has a risk. But of course compared to other investment forms, we know that banking so far is the safest haven, at least relatively. And commercial bank more than rural since the former is more stable, again relatively. (safest? - well, we could opt to put our money under our mattresses, but is it really an alternative, seriously?)
Since we are trying to point out if this is a hoax or a truth (first we must come up with the name) or at the most, predict what might be possible by comparing it to the fate of some known firms that have gone bankrupt like Lehman brothers and AIG, we must also acknowledge the difference among them.
Well, I’m not really an expert because my profession is FAAAAR from banking and finance or accounting (in fact it’s the opposite, as I think it’s more of a charity!), but I will try to contribute. Sana tama ang karamihan sa sasabihin ko.
Commercial banks are different from Investment banks. And Lehman Brothers, AIG, Bear Sterns, Washington Mutual, etc etc. fall under the latter.
Commercial banks are engaged in raising funds, though deposits (TD, savings) from corporations to individuals which they try to profit from by loaning this to businesses and consumers in place of a collateral or a lien to the title of the house if it’s a housing loan (which secures them by the way, should the borrower fails to default on the loan), or buy corporate and government bonds. In terms of mortgage loan, they either directly provide the loan – if you get approved, given a tight lending policy - or acquire these mortgages from simply purchasing it from mortgage bankers or institutions.
Investment banks on the other hand, profit from companies, governments and individuals investors by issuing and selling securities in the capital markets (equities and bonds), as well as offering advisory services for mergers and acquisition or trading for clients and underwriting securities.
In the past years however, investment banks have expanded on providing financial services such as a mortgage loan. In the case of the subprime crisis, they provided such loans to people with poor credit rating (or those who are likely to default payment, when hindsight should be 20/20?
)-which I don’t think would be given by commercial banks, by the way - made a security out of these loans then sold them to investors. With subprime foreclosures, come a vicious cycle of increasing debt, loss of confidence, withdrawals of investment, eventually bankruptcy. Not really sure about Philippine laws that govern the activities of these two types of banks. But in other countries, it is ruled that commercial banks should be engaged only in banking activities and investment banks with investment activities. But it is not necessary that they should be a separate company. That is the reason why commercials banks have their investment divisions.
My point, just because investment banks are deteriorating one after the other, commercial banks will ultimately follow. I mean, given the conservativeness of the latter in terms of revenue sources, not to mention the nature of their business, reasons for bankruptcy may fall under a different category, and not entirely because of the subprime mortgage crisis, unless of course they go beyond the confines of their industry.
But of course, like many other businesses, commercial banks may fall – poor macroeconmonic conditions, poor management, poor accounting – which all boils down to making bad decisions. In the case of risky investment, too much exposure than they can handle.
You are right, a risk no matter how small it is, is still a risk. Thus we must take coverage.
But getting unduly anxious over something we don’t understand is a different thing.
So to those who are more knowledgeable about banking, please enlighten us more.
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