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LITERATURE REVIEW OF PROBLEM STATEMENT
SUBMITTED BY:
ALI ASGHAR
JAWAD ALI
UMER SHAEES
SUBMITTED TO
Amna Saleh
NATIONAL UNIVERSITY OF MODREN LANGUAGES
ISLAMABAD
DECEMBER 22, 2024
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Failure Story: Lehman Brothers' Collapse in 2008
Lehman Brothers is a bank that ranked the fourth investment house in the U.S. It filed
for bankruptcy on September 15, 2008. The firm has made significant contributions to
the present financial crisis around the globe.
Why it failed
1. Excessive risk: The firm specialized heavily in lending and securitization for subprime
mortgage packages by taking high-risk loans to MBS.
2. Over-Leverage Lehman traded with an over-optimistic high leverage ratio: it was
borrowing much higher than its ability to be sustained.
3. Lacking in Liquidity; when the market turned the other way, it had no ease of meeting
some obligations, and therefore started running short of liquidity
4. Inadequate Risk Management: Lehman underestimate risks from investments by it
and no good steps have been taken to help mitigate that.
5. **Unchecked Regulation:** Absence of regulatory controls and checks on Lehman
activities allowed unsafe practice with minimum intermedial intervention. ***\\
Aftermath:
Liquation of assets to the tune of $600 billion.
Severe loss of jobs and investors.
This gave birth to recession because it completely wiped off the public confidence in
the financial system.
1. **Risk Management Implementation:** Institutions should implement good risk
assessment frameworks that may better identify and mitigate threats from potential
risks.
2. **No Over-leverage:** Healthy debt levels should be maintained to avoid the
likelihood of insolvency in a market downturn.
3. **Transparency and Reporting:** Full reporting of financial activity as well as risks to
infuse stakeholder confidence as well as oversight.
4. **Regulatory Oversight:** Stronger regulations and enforcement are necessary to
avoid unchecked risky behavior. 5. **Liquidity Management:** Institutions must
maintain adequate liquidity buffers to handle sudden financial stress. ---
### **Recommendations** 1. **Strengthen Risk Governance:** Create a dedicated risk
management committee within the bank's board. 2. **Stress Testing:** Conduct regular
stress tests to assess resilience under various economic scenarios.
3. **Transparency Improvement:** Enhance disclosure requirements about
sophisticated financial products. 4. **Capital:** Adhere to Basel III capital reserve
requirements. 5. **Regulatory Reforms:** Strengthen supervisory controls and impose
stiffer penalties on violators thereof. 6. **Emergency Preparedness:** Design
contingency plans in case of liquidity crises and other systemic risks.
The collapse of Lehman Brothers represents the dangers of uncontrolled risk-taking as
well as the need for strong governance and oversight of the banking industry.
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