This personal statement was part of this student’s successful application to University of Leeds, University of Bath, University of Exeter, University of Warwick and Lancaster University for Accounting and Finance.
The securitization disaster that occurred in 2008, I believe, was largely caused by credit rating agencies— because they were the enablers. Although not being the author of the subprime mortgage debacle, the fact that they did not perform rigorous due diligence on the underlying loans when rating the securities makes them very culpable. If they just did, perhaps like verifying whether the borrowers could cope with the payment when the teaser rate expires or verify the borrowers’ total debt load, maybe they would have rejected the deals offered by banks to extend their triple-A ratings on the securities since they will know how truly worthless the securities actually are. But they did accept it, and thus the debris of the crisis showed us how bad regulatory capture can be. It really struck me that I needed to further my studies in accounting and finance because as we can see, if the regulatory framework was better, e.g. having a sole authority to supervise and regulate the agencies and banks, the severity of the crisis would be reduced greatly.
Accordingly, I then started to take interest in Basel III, a regulatory framework in response to the disaster. Despite some improvement, Basel III still uses old traditional ways of capturing risk with the concept of risk-weighting. This was the main reason that led many banks to bankruptcy in 2008 as banks did not hold much capital on the supposedly ‘triple-A’ securities, such as Collateral Debt Obligations. Banks were madly incentivized to hold these products because it let them enhance their profit without limiting their loan-making capacity as these assets were given a zero risk-weight. But as we know, the securities did not always remain safe, and it unexpectedly turned to junk. This result really exposed us to how the concept has moved the banks’ to be dangerously exposed to immeasurable risk instead. If not changed, similar crises would definitely occur; perhaps this time through banks lending to high-rated sovereign as it is seemingly safe, yet filled with immeasurable risk (sovereign default). Thus, working to address this flaw in the future regulatory framework is indeed important and I hope that learning accounting and finance will equip me with the necessary knowledge to change the framework to be more forward-looking in regards to risk.
In light of COVID-19, banks are again vulnerable as credit risk keeps escalating. Hence, it is crucial for banks to reassess their loans and update their calculations of expected credit losses in accordance with IFRS 9 to avoid unexpected losses. But in doing so, banks’ IFRS 9 models need to really reflect the true extent of the situation. The adjustment could backfire if taken too far as over-provisioning may lead to lower bank lending, therefore a weaker economic recovery. This may therefore be counterproductive and may actually lead to a weaker banking system overall. Thus, as we can see, in times to come, updating accounting standards is vital because different times call for different measures. This furthers my interest in studying accounting and finance.
As an active volunteer of En Xin Charity, going to orphanages and helping the homeless has made me realize how critical the economy can affect one’s life. Since banks’ health goes hand in hand with the economy, developing a solid and sound financial system is paramount, because the result of it failing will cause millions to suffer. By taking accounting and finance, I will be able to dedicate myself to the betterment of the financial system, by improving accounting standards and regulatory framework for banks’ when working in my country’s central bank in the future. With that, helping millions of people in the process.
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