Causes of crisis, according to the HSBC Chairman Mr. Green, were complex and inter-related. A number of reasons include global financial imbalance that was created by speeding transfer of global economy towards emerging markets. It was the macro economic triangle of consumer nations, producing nations and resource providers that opened the doors of high growth rate. It resulted in financial imbalance in consumer markets like America where deficit of liquidity was immensely felt. Second reason of the US economy taking a wrong turn was that the producing and resource providing countries had plenty of cheap credit, which they invested in US dollar.
It created a boom in consumer market and fuelled the housing market. As mortgage market didn’t follow stringent rules while sanctioning home loan in America and in some of the emerging markets, it deepened the crisis further. Another reason was complex structure of securitization. Behavior of securities as financial instruments got beyond the comprehension of investors as well as senior bankers. Another cause of crisis was over dependence on wholesale funding, which the banks assumed that would be ever available.
HSBC Holdings plc took a number of precautionary measures well in time to save it from the affects of worldwide recession caused mainly by the sub-prime fiasco. Foresight of the management saved the situation from worsening, as it had happened with other financial organizations. The bank initiated a number of steps to reposition its finance by reducing its credit risk by closing more than 200 consumer lending branches and increased tightening criteria for fresh loans in about 800 branches. These decisions were in sync with the decisions taken in 2007 to stop buying mortgages from third parties and close the wholesale business to stop further business generation in mortgages.
In view of the large scale loan impairment and rising delinquency levels, HSBC Bank took additional steps of tightening underwriting standards, which included decreasing the loan to value ratio for residential mortgages, stopping the underwriting of some products and increasing the credit requirements for some risk factors. As a result, demand for fresh loans declined to 38 per cent of the levels registered in 2007. HSBC provided debt restructuring to certain credit worthy customers to save their businesses from closing.
A good number of loans were, thus, restructured to be serviced on revised terms. In North America, HSBC reduced mortgage lending by 15 percent. The bank reduced its risk in consumer lending portfolio as a precautionary measure. The bank sold its mortgage portfolio of US$7.0 billion in the year 2008 in secondary markets. Further decreasing its risk hunger, it closed its whole sale and third party prime mortgage business in November 2008. HSBC restructured its lending business in the US by enlarging its sub prime credit range for government sponsored entities and conformed loan products.
By February 2009, HSBC ordered closure as soon as possible branch based consumer lending finance business in North America. Thus, HSBC Bank took a number of precautionary steps to divert the severe after-effects of the credit crisis by facing the problems because of its better hold on the financial market nerves. Reference HSBC Holdings Plc 2008, Annual Report and Accounts, ’Strength, diversity and resilience’, Viewed 19 May 2010,