Essay About Subprime Loan Crisis Hsbc And Hsbcs Decision Support Systems

International Business Hsbc
HSBC had sophisticated information systems which would have been able to handle the relevant variables and analytical tools to proper measured the credit risk and avoid the crisis. Proof of this,it is that after the subprime loan crisis HSBC quickly adjusted its models and implemented newpolicies and promptly corrected the problem from that moment on.The problem was caused not by the Technology side, but by the human side: Management andOrganization. The Model Base used by HSBCs Decision Support Systems was not flawless and it was not prepared to evaluate unusual situations where for example: a real estate bubble wasbeing created, a economic recession was on the verge, or when loans were being given with littleor no down payment, and even without any support documentation. The decision to use a certainmodel as the most accurate to be loaded in a DSS relies on the management.Nobody would like to do on purpose a mistake, so even if as I have just said the management is atfault for the crisis suffered by HSBC; I consider that I only answered the first question6; the shortanswer is because the correct model base was not used.The second question7, I believe it has to do more with psychology than anything else. The reasonsbehind this can be found re-reading the fabulous speech by Charlie Munger about Psychology of Human Misjudgment8. The HSBC management suffered a lollapalooza effect of several of thecauses for misjudgment. The first one is under-recognition of the power of incentives, in other words the Management were being greedy, they were after short term great performances toachieve their bonuses instead of thinking about the long term. Another cause that they suffered was confirmation bias, which is simply ignoring early red flags which showed that their models for estimating risk were flawed, not because they on purposeignore them, but because they literally could not see them. Another one that played a role in thecrisis was the deprival super-reaction syndrome