Financial institutions may use several methodologies to mitigate at least one type of especially pernicious operational risk: bad lending. Marshall includes bad lending in a list of potential catastrophic losses that can threaten the viability of a company.1 Not only did bad lending associated with subprime mortgages drive many lenders out of business, but also linkages through the securitization market threatened the viability of many global financial markets.
KeywordsOperational Risk Operational Failure Appraisal Error Mortgage Fraud Mortgage Origination
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- 1.Marshall’s list of potential catastrophic losses also includes rogue trading, insider fraud, poorly understood derivatives, poorly rolled-out new products, inadequate controls in emerging markets, counterparty failures, natural disasters, and snowballing reputational losses. See Christopher Marshall, Measuring and Managing Operational Risks in Financial Institutions: Tools, Techniques, and other Resources (Singapore: John Wiley & Sons, 2001), p. 75.Google Scholar
- 21.The originate-to-sell business model also complicated regulation of subprime lending. Some mortgage originators would tend to abuse the securitization channel to hide shoddy originations. Michael Lewis’s book, The Big Short: Inside the Doomsday Machine (New York: W.W. Norton, 2010)Google Scholar
- 24.See Arthur J. Wilburn, Practical Statistical Sampling for Auditors (New York: Marcel Dekker, 1984).Google Scholar