Crises lead banks to operate more opportunistically

Sep 21, 2009

Financial crises place significant strain on banks, causing them to behave more opportunistically than clients are accustomed to. Business clients should count on this, according to Uppsala University business economist Kristina Furusten, who has studied the topic of contractual relationships between banks and corporate clients during the 1990s financial crisis in Sweden.

During the 1990s financial crisis, Swedish were criticised in the media for causing unnecessary corporate bankruptcies through, for example, increased collateral requirements and unexpected credit cancellations. Questions, similar to those being raised today, were raised about the morality of bank behaviour.

"Credit relationships between banks and their clients are based both on formal, written credit agreements and informal understandings and accords," explains Kristina Furusten of the Department of Business Studies. "Clients are presumed to operate opportunistically at the expense of the banks, but not vice versa."

As Kristina Furusten shows in her dissertation, however, banks did behave opportunistically during the 1990s financial crisis. They breached verbal agreements more often than had been usual and altered the practices that governed their relationships with clients. They took more frequent recourse to the terms of written agreements, which they interpreted more strictly than they had prior to the . Their relationships with clients assumed a more formal character, and the psychological climate changed. The actions of bank office managers and loan officers were more tightly controlled by bank rules, and major bank reorganisations occurred. Many clients were assigned new officers at centralised insolvency departments, leaving them feeling anonymous and illtreated. Companies with financial difficulties faced poorer prospects for obtaining support from their banks.

"The conclusion is that contractual relationships are characterised by mutual opportunism when banks find themselves in crisis situations," says Kristina Furusten.

Strong external pressure from such sources as the state, the financial supervisory authority and rating institutes prompts banks to make a clear break with previous practices as a way of restoring their credibility. Significant pressure is also brought to bear on individual bank employees, causing them to fear making decisions that they might subsequently be called on to defend.

"Individual companies need to appreciate that their agreements with banks are dynamic, that the conditions are subject to change over time and that banks always have the advantage when it comes to interpretation," says Kristina Furusten.

Provided by Uppsala University (news : web)

Explore further: 3 Qs: Economist makes the case for new quasi-experiments as a way of studying environmental issues

add to favorites email to friend print save as pdf

Related Stories

Effective global regulation

Nov 17, 2008

Government ownership of banks – something unthinkable until very recently for the 'Anglo-Saxon' model of capitalism –- became a reality early in 2008. This was a policy response to an unprecedented global financial crisis, ...

Mortgage crisis: Blame the bank?

Aug 27, 2008

(PhysOrg.com) -- Banks have played a big role in the mortgage crisis, not only because they issued loans to suspect borrowers, but because many originated and sold bad loans to other lenders, says a University of Michigan ...

Recommended for you

Which foods may cost you more due to Calif. drought

Apr 17, 2014

With California experiencing one of its worst droughts on record, grocery shoppers across the country can expect to see a short supply of certain fruits and vegetables in stores, and to pay higher prices ...

Performance measures for CEOs vary greatly, study finds

Apr 16, 2014

As companies file their annual proxy statements with the U.S. Securities and Exchange Commission (SEC) this spring, a new study by Rice University and Cornell University shows just how S&P 500 companies have ...

Investment helps keep transport up to speed

Apr 16, 2014

Greater investment in education and training for employees will be required to meet the future needs of the transport and logistics industry, according to recent reports by Monash University researchers.

User comments : 1

Adjust slider to filter visible comments by rank

Display comments: newest first

zevkirsh
not rated yet Sep 21, 2009
the popularization of high frequency flash trading amongst the major banks is grea tevidence.
they're willing to take huge risks of getting caught violating laws and sec reguatlions because they need the money or they will go broke AND the government has already proven that they they don't want the banks to go broke as they've bailed them out, so why would they enforce regulations that would break the banks while the governments primary concern is in keeping them afloat via the bailout;

could you believe if obama shuttered up a major bank by way of flushing its money out in a massive fraud investigation......people would then wonder.....WHY IN HELL DID YOU BAIL THEM OUT?!!?!!??!! only to shut them down later!
obviously , this would uncover the massive upward redistribution of wealth that will be the only meaningful social result of the bailout.

More news stories

Study finds law dramatically curbing need for speed

Almost seven years have passed since Ontario's street-racing legislation hit the books and, according to one Western researcher, it has succeeded in putting the brakes on the number of convictions and, more importantly, injuries ...

Impact glass stores biodata for millions of years

(Phys.org) —Bits of plant life encapsulated in molten glass by asteroid and comet impacts millions of years ago give geologists information about climate and life forms on the ancient Earth. Scientists ...