The complex financial products have produced severe imbalances world over, indicating that regulators face a truly difficult task ahead to tide over the challenges. A series of banking failures is threatening the entire system, and may have dire consequences in the near future.

The headlines about the larger than expected writedowns at the world's biggest investment banks underlined how the financial turbulence is continuing to affect the credit markets. The trouble began last June when two Bear Stearns-managed hedge funds collapsed due to bad bets on mortgage-backed securities. According to Fitch ratings agency research, in subprime mortgage-related assets, global banks have already disclosed losses of $165 bn leaving the remainder still to be announced. In a sign of tough times from the credit crisis, Goldman Sachs credit products business posted losses of $775 mn. The devastating revenues of fixed-income sales and trading divisions in banks offered another reminder of market participants' adjustment to the stress from the downturn in the housing market. With the value of subprime securities still falling, threat of further writedowns could cause serious damage to capital markets' businesses. There was a major shake-up of the investment banking units, as all the banks considered laying off and retirements of their staff, a move of strategic rebuilding. Several bosses, including UBS's Huw Jenkins, Citigroup's Charles Prince and Bear Stearns' James Cayne, came under enormous pressure to steady the investment banks' tide of losses and tighten risk management.

Big differences in the quality of risk management and the heavy trading losses raised questions about the risk management, practices at investment banks. Even the banks with the best risk controls like UBS, long regarded as a leader in risk management, ran into trouble. It is a fact that innovation had overtaken regulation, which means regulators and rating agencies have failed to assess the risks involved with these derivative products. The surge of bank failures for the past one year and the closure of California mortgage lender, IndyMac Bancorp, turned out as the third largest bank failure in the US history. Continued credit market woes are posing a threat to market stability world over, especially after the US Treasury Department and the US Federal Reserve expressed support to shore up the US mortgage giants Fannie Mae and Freddie Mac.

Professional Banker Magazine, Financial Products, Financial Turbulence, Credit Markets, Mortgage-backed Securities, Subprime Mortgage-related Assets, Global Banks, Housing Market, Capital Markets, Investment Banking Units, Risk Management, Global Financial Markets, Collateralized Debt Obligations, Structured Investment Vehicle, SIV, Liquidity Management.