People factors of HSBC:
- HSBC accepted the loan of the wholesalers based on their income and credit scores which has to be HSBC standard, but due to the extreme competitions for mortgages and also for the HSBC analysts and executive level decision, they started giving state-income loans. For these sorts of loans borrower just needs to declare his or her income with providing any documentation to verify. As a result, they can easily get the approval of the loans which are much higher than their actual afford. Therefore the people who were Dealings with the loans and customers did not verify the information supplied by the customers properly, therefore HSBC suffered crisis.
Technological Factors of HSBC:
- For analyzing applicants for credit cards, card loans and fixed rate mortgage, HSBC used a credit rating from air Isaac Corp. of Minneapolis called a FIFO score. But, FICO scoring systems had not a good tool in terms of predicting the performance. As FICO score were unable to effectively make the differences between loans where borrowers got their own money down or loans without any down payments. And these sort of systems HSBC used also responsible for their problem.
Did HSBC management correctly identify the problem?
HSBC were going through with lots of problems and the management of HSBC correctly indentified their problem. Therefore, they made changes in both of the sectors personnel and policy. They also develop their technological activities.
Answer to the question no.2:-
Information Technology is important for new competitiveness for today’s enterprise in the international marketplace. Role of information systems and technology is really important for today’s business. However, HSBC used sophisticated systems and tools for analyzing their business but Proper implementation is also so important for business success. The following charts show four major types of information systems:
Source: lecture sheet (2)
Four general levels:
- Management-level like Decision Support Systems, Management Information Systems (MIS).
- Knowledge-level systems for example Knowledge based work systems.
- Strategic-level systems for example Executive Support Systems.
- Operational-level for example Transaction Processing Systems.
A frame work for information Systems:
- Executive Support Systems (ESS)
- Management Information Systems (MIS)
- Decision Support Systems (DSS)
- Transaction Processing Systems (TPS)
Executive Support Systems (ESS):
According to Laudon, K. & Laudon, J. (2007) “Information system at the strategic level of an organization that addresses unstructured decision making through advanced graphics and communications.” Executive Support Systems serves the organizations strategic level. Model of typical executive support systems:
Source: lecture sheet (2)
In the case study HSBC, did not use their Executive Support Systems properly in terms of projections and responses to quires and therefore they faced the mortgage crisis.
Management Information Systems (MIS):
According to Laudon, K. & Laudon, J. (2007) ”Information system at the management level of an organization that serves the functions of planning, controlling, and decision making by providing routine summary and exception reports.” In the case of HSBC, MIS was so important, as they support structured decisions, at the operational and management control levels, and also used for planning purposes of senior management staff. But their management information system was not used properly in terms of providing loans.
Decision Support Systems (DSS):
According to Laudon, K. & Laudon, J. (2007) “Information system at the management level of an organization that combines data and sophisticated analytical models or data analysis tools to support semi-structured and unstructured decision making.” The major difference between a DSS and any other information systems is that it contains complex mathematical models to suggest the organization regarding a changeable situation or an ill-structured problem area.
Some characteristics of Decision-Support Systems which are given below:
- DSS offer users flexibility, adaptability, and a quick response.
- DSS provide support for decisions and problems whose solutions cannot be specified in advance.
- DSS use sophisticated data analysis and modelling tools.
- DSS operate with little or no assistance from professional programmers.
AS DSS serve management level with data analysis for making decisions but in the case of HSBC their DSS did performed correctly in terms of decisions and problems, which solution was difficult to specify in advance. Therefore they took lots of decision which was not correct and they scuffed losses.
Transaction Processing Systems (TPS):-
Computerized system which records the daily routine transactions essential to conduct the business successfully. These systems serve the operational level of the organization. The following chart shows a symbolic representation for a payroll:-
Source: Baradon, D. “project management for modern information systems”. P-275
In the case of HSBC, their TPS was not used properly either as their operational level used systems which was not performs in terms making transactions and approving loans to the customers.
Reasons of HSBC into trouble in spite of having sophisticated information systems:
So, it has been clear that information systems can play a vital role in business world. Information systems are important in all sectors like operational level, knowledge level, management level systems and strategic level. HSBC got sophisticated information systems and analytical tools. However, due to the intense competitions for mortgages, they ignored lots of facts in terms of accepting loans for the borrowers. They also did not use their systems properly, they have their software but they did not use it as they were more interested about their profit and interest.
Why did not right solution not used?
HSBC got the solution regarding the problem of mortgages loan crisis but they did not use the right solution, as they were more interested about making business profit. All the times they were searching for good business opportunities. They accepted state-income loans without determining whether it met their standards. For these sorts of loans borrower just needs to declare his or her income with providing any documentation to verify. As they were paying attention only with their higher interest. Therefore, HSBC did not use their right solution to face the problem.
Answer to the question no.3:-
HSBC`s solution Analyze to deal with its problems:
In response to its subprime loan crisis, HSBC took number of steps which are as follows:
- HSBC got problems in their policies; therefore they made changes in both personnel and policies. For different types of mortgages they established different types of policies.
- They ceased originating and purchasing stated-income loans and boosted the require FICO score for some loans.
- HSBC increase the number of customer’s representatives in order to deal with the borrowers who were failed to make their payments and also discuss with the customers regarding the payments which are more convenient. Those operations they started running seven days a week.
- HSBC also started utilizing information technology to identify which customers are most likely to unable to make their monthly payments.
- HSBC adopted business analytics software to help support the decision making of its credit application processing staff. By using this software they would be able to create even strategies for individual applicants, assess the value of each applicant and then customize a loan offer that suits the customers.
Additional factors which HSBC has not accounted:
The solutions has been taken by HSBC to face the subprime loan crisis would not be sufficient. In my point of view, there have some additional factors which should be considered by HSBC in order to face the crisis. Problem solving is a tool, a skill and a process. It is a tool because it can help you to solve an immediate problem or to achieve a goal. It is also a process because it involves a number of steps.
The Following charts show some steps to problem solving:
Source: Michen, B. (2002) “Business problem solving Techniques”, p-45.
The following techniques can be considered by HSBC:
- Extracting maximum information from facts.
- Breaking problems down into manageable parts.
- Identifying likely causes of problems.
- Understanding how factors affect each other.
- Analyzing strengths, weaknesses, opportunities and threats.
HSBC also can introduce Risk management systems. The following chart shows the Risk management process:
Source: [Accessed on 24th April]
Risk management is very important of any organization for their strategic management. Identification and treatment of the risks is the main focus of the good risk management systems. Its main objective is to add highest Sustainable value to all the performance of the Organization. So these all are the above factors HSBC can be considered.
Answer to the question no.4:-
HSBC Made changes in their business approach in order to face the subprime mortgage crisis. They modified their personnel and change their policy. They also made changes in their information technology. Now they would be able to utilize information systems for specific market focus, and serve narrow target market better than competitors. The following chart shows the redesigning mortgage process in the U.S.
Source: Lecture Sheet (1)
So by their changing approach they would be also able to reduce cost of their mortgage processing. By using updated information technology, it would be easier for them to process loans and verified documents of customers more accurately.
Impact on business:
Changing approach of HSBC is a big challenge and by implementing they can be benefited in all the way. As HSBC started utilizing information technology, for building successful organizations. So they can now improve their customer relations, provide better information for decision making, strengthen productivity and promote global competitiveness. So their changes can make the following possible impact in their business
- Identify business goals and strategies
- Break strategic goals into concrete activities and processes
- Identify metrics for measuring progress
- Determine how IT can help achieve business goals
- Measure actual performance
Impact on Customers:
By their changing approach they would be able to improve their product and provide better service to the customers. Therefore customers would be encouraged to make invest to this bank in future and also customers would be happier by making transaction with them.
Impact on U.S economy:
HSBC is so big commercial bank, so they have impact on U.S economy. The following possible way HSBC might effect on U.S economy:
- HSBC make trade through the derivatives in the form of Futures and Options in the international markets, creating huge economic bubble up conditions and causes for economic development.
- Their changing approach can be helpful for social welfare and less social inequality and thus U.S economy can be benefited.
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HSBC also can be helpful to reduce poverty by expansion of rural and agricultural operational. And thus economic growth is possible.
- HSBC also helps to reduce unemployment by providing loans and schemes which also helpful for the economic development.
- They also providing financing facilities including loans to businesses, for ethical and moral activities which are beneficial to the society and also for the economy.
- Finally, they would helps to reduce the rocketing inflation through less artificial money creation and less funding of speculative businesses.
Answer to the question no.5:-
The Three levels of decision making are important in every business. According to the position of the decision maker in the organization gives information as required to support the decision.
The following chars show the levels of decisions:
Source: lecture sheet (2)
Classification of decisions by decision type and their relation to different types of management:
Source: Laudon, K. & Laudon, J. (2007) “Mananagement Information Systems”, p-478
Unstructured decisions:
Unstructured decision involved complex Situations, where the decisions are complicated and unknown. Where the decision maker rely heavily on the experience, judgment and knowledge for such decisions. As part of HSBC`s business strategy their top level management decided to continue giving subprime mortgage loans to the U.S customers. A subprime mortgage loan is a kind of loans which is offered to customers with poor credit history and low income. Though it was high risky HSBC continued with loans, not only that but also they begin buying up subprime loans from different sources like wholesale mortgage company and independent brokers and others banks. The housing boom and high competitions among the lenders influenced HSBC to make such decisions. Despite of being high risky the loan seems to be tempting because of their high interest which was source of higher revenue for HSBC. These decisions, which were unstructured, were made by top level management based on their judgment market evaluation risk analysis and others internal and external factors. Later on, to overcome the mortgage crisis HSBC made some decisions. They made some changes in their personnel and policies. They stop giving state income loans and increased the required FICO score for qualifying the loans. So all that top level management decisions lead to significant changes in HSBC.
Semi-structure decisions:
Where a number features can be shared with both the operational and strategic levels. IN the case of HSBC, In terms of purchasing pool of mortgages loan s from wholesaler the middle level management made some semi structure decision s which includes offering state income loans. HSBC accepting the loans application based on their credit score and documentation like income level, occupation, job position etc. Middle level management made the above semi structure decisions by co-coordinating the decision of the top level management with the implementation by the operational management.
Structured Decisions:
Structured decision involved repeated and routine works that are managed using certain procedure by the operational management. In the case of HSBC, they decided to pursue subprime mortgage and to implement these, they set guidelines to the operational level management. The operational management approved the credit cards, loans and mortgages based on FICO (Fair Isaac Corporation of Minneapolis) score which is a credit rating institution. They accepted it as a reliable tool for sectioning loans to the customers. This sort of decisions was made by operational management which was structured decision that followed certain procedure.
When deciding to pursue subprime mortgages they took some wrong decisions in their decision making process. In my opinion where in the decision making process HSBC went are described below.
- HSBC flipped some of the second-lien mortgages loans to others company and keep some as investment. HSBC predicted customers will continue the payments and they will earn revenue from the interest. But customers were unable to go on with their payments and that incurred losses to HSBC. In my opinion, HSBC failed to make proper market analysis that lead to wrong forecasting.
- When providing State income loans, HSBC relied on the information and documents supplied by the applicants. But ninety percentages of the applicants declared their income higher than their real income. Some people overstated their employment position. Therefore they got the loans more than they can afford. In my opinion they did not verified the information and documents of the customers and that was a mistake done by HSBC.
- When evaluating applicants for credit card, loans and fixed rate mortgages they relied on FICO credit score, but it was not proven as a reliable tool for approving second lien loans and mortgages. So in my opinion using the FICO scoring systems was a wrong decision.
References:-
Books:
- Laudon, K. & Laudon, J. (2007) “Mananagement Information Systems”, Eleventh Edition, Pearson publication, pp-474-493.
- Baradon, D. (2006) “project management for modern information systems”, Six Edition, IRM Publication, P-275.
- Michen, B. (2002) “Business problem solving Techniques”, Second Edition, p-45.
Lecture sheet:-
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Brown-Houston, M. (2010) “ICT for Strategic Advantage” [Lecture 1] Available from- (university of Bolton)
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Brown-Houston, M. (2010) “ICT for Strategic Advantage” [Lecture 2] Available from- (university of Bolton)
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Brown-Houston, M. (2010) “Evolving Nature Of Business” [Lecture 2, Topic-2] Available from- (university of Bolton)
Websites:-
- Alarm, Q. (2002) The Risk Management Standard (online)
[Accessed on 24th April]