Lessons must be learnt from US financial crisis

A newspaper headline a few days ago proclaimed it as some kind of a revolution. The “one-minute” approval process for loan applications is good news for people in dire financial straits, but those familiar with America’s economic meltdown in late 2000s may not be too eager about the development, which gave them an ominous sense of deja vu. Quick loan approval processes, if introduced without effective backup measures, can be the equivalent of throwing caution to the winds while the stakes are extremely high.
The American experience was caused by a staggering amount of unpaid loans, which crippled the financial system in the United States and beyond. The loans were largely mortgage-related, and were given out with little, if not zero, attention to borrowers’ crucial financial information. There were loans that required no employment confirmation or income verification. “Collateral” was something loan givers barely asked for. Prospective borrowers’ financial histories were non-existent in many cases, as many of them were simply seeking loans for the first time.
Verification standards in Thailand now and the United States then are more or less similarly risky. There are some differences between what is happening in Thailand now and America during the “sub-prime” crisis, in which high-interest yet easy loans were given to people because everyone was being misled by a housing bubble. There is no particular “bubble” in Thailand at the moment, but financial institutions competing to loan their money out can create a situation akin to the prequel to the near collapse of the US economy.
Competition for loan growth can lead to a lowering of verification standards. On the one hand, money being loaned out to people in need is a good thing in many ways. Banks have always been mocked for offering loans to only well-to-do people, whereas those who really needed it were not allowed to get anywhere near the money. A change from the cautious practice has to be welcomed by a lot of people.
On the other hand, the practice of extreme caution is there for good reasons. Most of all, it is what provides financial stability. Well-screened loans are banks’ assets whereas easy loans have a bigger chance of turning into liabilities. When creditors say they are taking less time to consider loan applications, it means either the verification process is effective yet quicker, or some normal procedures are being skipped to be more or competitive.
We can only hope all the key procedures remain part of it but are made quicker by the use of technology. If not, the chances of the financial system being flooded by non-performing loans will be high. In a tightly interlinked economic system, when one key institution has a problem, many others will do, too, as was the case in the American chaos in which key players folded one after another in a devastating chain reaction.
The worst thing about the American crisis is that a massive amount of taxpayers’ money was used to bail out a system plagued with imprudent or corrupt financial players. At the time, everyone said a painful lesson had been learned and it would never happen again. However, with the global economic system relying largely on speculation, which in many cases can be portrayed as “leverage”, risky practices remain part of the game.
In the economy, one trouble feeds another. Some potential problems also come with haircuts, possibly masquerading as “innovations”, just like the time before the US crisis struck when mortgage-backed securities – that sparked the reckless loan frenzy – were hailed as a brilliant idea. Now in the Thai financial system, “innovation” is a word that has begun to creep in, which can be scary if one knows the history.