Governance and Management:
A bad decision starts with at least one influential person making an error
of judgment. But normally, the decision process will save the day: facts
will be brought to the table that challenge the flawed thinking, or other
people with different views will influence the outcome. So the second
factor that contributes to a bad decision is the way the decision is
managed: for whatever reason, as the decision is being discussed, the
erroneous views are not exposed and corrected.
—SYDNEY FINKELSTEIN, JO WHITEHEAD, ANDREW CAMPBELL,
THINK AGAIN, 2008
How can the financial system be strengthened to reduce the incidence and costliness of financial meltdowns? Consider lessons learned about the model of successful governance and management, especially risk management, and then possible ways to increase their quality at all large complex financial institutions. The focus is on large complex financial institutions because they tend to pose greater systemic risk than smaller institutions, even if the smaller institutions act in a herd, as happened in the savings and loan crisis of the 1980s.
Depending on the definition one uses, large complex financial institutions would include the nineteen largest bank holding companies in the United States, with assets over $100 billion, which the Fed selected for its Supervisory Capital Assessment Program in 2009. Together these nineteen firms held twothirds of the assets and more than half of the loans in the US banking sector that year.1 Besides bank holding companies, other large complex institutions might include major insurance companies (think of AIG) or large investment funds or the Federal Home Loan Bank System, a GSE with a trillion dollars of assets.