From last September the financial turmoil worsened and entered a second phase (intense crisis), the onset of which was marked by certain systemic events, each individually of notable size. Practically all the key financial markets were blocked, and this hit financial institutions hard. The harshness of the situation is evident from a look at the swathe of events which took place in less than two months: -  As a prelude, at the beginning of September the mortgage finance firms, Freddie Mac and Fannie Mae, which accounted for 50% of US mortgage lending, finally had to be bailed out by the Treasury. -  However, the bankruptcy of Lehman Brothers, the largest in the history of the United States, proved to be a turning point, precipitating a series of extremely serious bouts of financial instability. The background to this bankruptcy was that institutional investors had begun to withdraw large sums of money from investment banks, a phenomenon that led to the virtual disappearance of these banks in the course of a few short weeks in September. Merrill Lynch was acquired by Bank of America, while Goldman Sachs and Morgan Stanley became commercial banks. At almost exactly the same time as the Lehman bankruptcy, the financial strains were evident in an extremely serious form in the insurance industry, which had  2  BIS Review 133/2008  already been under considerable pressure on account of the deterioration in highly rated financial products to which it was severely exposed.
Accordingly, a commitment to rationalise costs must be a management priority for banks. The third and final challenge that will exert even more pressure on banks’ income statements in the coming quarters also arises from the weakness of the economic situation. Apart from the global deceleration, which primarily affects consumption and capital investment, we must not forget that the Spanish economy is in the midst of adjustment in the property sector. This adjustment had already begun, gradually, before the summer of 2007, bringing the sector progressively into line with the change in the determinants of residential investment. This gradual rate of adjustment was altered by the international financial crisis, which established a climate of mistrust and uncertainty which, in turn, intensified the slowdown. The consequence for the banking sector has been a rapid growth in doubtful assets ratios since end-2007. This growth has been recorded across-the-board, but especially in construction and property development. Despite the counterweight provided by the existence of the general provision in Spain and the very low starting levels of the doubtful assets ratio, this has led to the need for greater credit write-downs, which have to be taken to the income statement, and that is the third reason why profits will be under pressure in the banking sector. What must we do in this situation? Having reached this point, allow me some reflections on what we should do to address this situation.