Academic journal article Journal of Finance, Accounting and Management

Global Financial Crisis: Corporate Governance Failures and Lessons

Academic journal article Journal of Finance, Accounting and Management

Global Financial Crisis: Corporate Governance Failures and Lessons

Article excerpt

Introduction

The recent financial crisis is often termed as the most serious financial crisis after the Great Depression of 1930's (Blundell-Wignall et al., 2008; Cheffins, 2009; Kirkpatrick, 2009; Clarke, 2010; Lang and Jagtiani, 2010). Several researchers and reports reviewed the causes of this global financial crisis (Clarke, 2010; Laeven et al., 2010; Lang and Jagtiani, 2010; Tarraf, 2010; UNTACD, 2010; Yeoh, 2010). Many scholars implicate corporate governance as one of the main reasons for global crisis, while other factors play only a supplementary role (Kirkpatrick, 2009; Yeoh, 2009; Fetisov, 2010). Several deficiencies in the corporate governance structure and processes led to the collapse of many financial institutions, and triggering the crisis. Many banking and financial institutions did not pay due attention to corporate governance before and during the crisis.

The article makes an endeavor to ascertain what the various aspects related to corporate governance failed and the lessons that may be learned in the aftermath of the global financial crisis. It is important to study various aspects of corporate governance lapses during the crises because it will help in figuring out the normative implications for future reforms (Tarraf, 2010).

The structure of paper is as follows. Section two of the paper highlights why the recent crisis is global financial crisis as well as providing a brief taxonomy of the crisis. Section three delivers a literature review related to corporate governance failure during the crisis. Section four of paper 1) lists lessons that can be learned from this crisis, and 2) lists suggestions recommended by the researchers for future reforms. The last section of the paper provides some concluding remarks.

Global Financial Crisis

The financial crisis of 2007-08 was a crisis truly global in nature that affected all regions and countries of the world (Clarke, 2010). The scale and reach of this crisis was worrisome, and much bigger than the earlier region specific crises in Asia, Japan and United States, and was only comparable to the Great Depression. The fall of share prices on a single day was even more than the Great Depression of the 1930s (Cheffins, 2009). The International Monetary Fund (IMF) estimated the potential losses from this crisis were approximately $1400 billion up to the end of October 2008 (Clarke, 2010). The global crisis was initiated in the latter part of 2006 and by the end of 2008 engulfed the entire world. There were several macro- and micro- economics perspectives of this crisis (UNTACD, 2010). A brief overview of how this crisis took place is given by citing the following lines of a UNTACD report (2010, p.1-2):

Expansionary monetary policy with falling interest rates caused asset price booms, particularly in the U.S. housing sector. This was accompanied with a rapid expansion of lending and a corresponding decline in underwriting standards and increase in risk, fuelled in part by the unregulated growth of the so-called 'shadow banking system.' This side of the financial system developed between 2000 and 2008 and consists of institutions and legal entities that provide financial intermediation without taking deposits. As such, they are not subject to the same regulatory oversight as institutions that do take deposits. These institutions used short-term credit to invest heavily in sub-prime mortgage-backed securities, which became increasingly risky as housing prices began to fall in the US after mid-2006. In the absence of regulatory oversight, the risk inherent in these assets were not adequately rated, yet had become increasingly dispersed throughout the global financial system. Being highly leveraged and holding what became known as 'toxic assets', large financial institutions in the shadow banking system began to fail as default rates began to rise. Global credit markets contracted with the decline in confidence: the record high interest rates that banks used to lend to each other almost halted inter-bank lending. …

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