Banks made poor business decisions, did not have adequate risk management processes in place, and failed to understand the true nature of the complex transactions in which they were involved, according to a survey of financial institutions on the credit crunch by international legal practice Norton Rose LLP.

The report, “Credit Crunch: Are you legally protected?”, is based on a survey of 112 respondents (comprised of financial institutions and other mainstream corporate entities) in February and March 2008 to assess the impact of the credit crunch and gauge reaction to the legal risks.

When asked for their opinions on the causes of the credit crunch, 55% pointed to “poor business decisions by banks”, and 38% cited poor lending regulations in the US.

56% believed that banks and other financial institutions did not have sufficient risk management processes in place.

A large majority of respondents (79%) believed that the credit crunch would lead to increased litigation. When asked to identify factors to which a rise in litigation should be attributed, 55% pointed to a “lack of understanding of the structure of the underlying transaction” amongst other causes. 47% said it was because of a lack of understanding of the risks, and 29% mentioned a “mis-pricing of risk”.

Karl Rogers, International Securities Group partner based in Dubai and an experienced structured products and derivatives lawyer commented:

“Banks and other financial institutions need to reconsider their approach to risk management very carefully. Many products are now highly sophisticated and require expert knowledge to both develop and fully understand. Traders, structurers, lawyers and credit and market risk managers need to work as a team to make sure that all are aware of the economic and risk components of the product or transaction”.

Respondents were more optimistic about job cuts with over half (53%) saying they do not believe their organisations will make redundancies in the next 12 months.

The survey confirmed that there is a growing body of opinion which favours a change in the way bankers are remunerated.

425 said there should be a shift away from short term bonus plans towards longer term share incentive plans.

Some 40% came out firmly against it, but it is likely that the credit crunch is altering some opinions.

Overall market conditions will not improve for some time to come. 49% said it would take over 11 months for the credit markets to stabilise and 38% said it would take 7–11 months.

Respondents were also reconciled to a future that would be more closely regulated. 53% agreed that lead regulators or central banks should be given more powers to intervene in the management of financial institutions.