Banks and insolvent corporate customers: experience of the rescue culture
online resourceposted on 2006-04-05, 17:28 authored by Keith Pond
Over the last twenty years UK banks have reviewed and streamlined traditional credit assessment techniques for Small and Medium Sized Enterprises. In pursuit of margin and market share, today’s due diligence relies increasingly on centralised data and statistical “certainty” than on the more qualitative approach of the local bank manager. During this same period the nature of the banks’ “safety net”, the sanction of insolvency proceedings has changed too. The effect of this is not only to increase the potential for recovery, in respect of bad debts, but also to increase the moral hazard problem. However, increased risk is masked by creditor power in recovery situations. This paper draws on theoretical and empirical research from legal, ethical and economic viewpoints and suggests that a reappraisal of this aspect of the banker-customer relationship is essential to restore trust, prudence and long-term profitability.
- Business and Economics