Summary
Summary Lessons from the Financial Crisis
- Course
- AP/SOSC 4043
- Institution
- York University (Ebor )
its notes from an article by Kilpatrick, "lessons from the Financial Crisis"
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Kilpatrick believes much of the issue of financial crisis has to do with lack of oversight overexecutive boards in risk taking something like Gevurtz, but focuses more on macroeconomic
influences and investigative procedures
Kilpatrick believes the issue is accountability in the internal corporate governance models and
practices that are supposed to be a part of risk management, controls related to financial reporting
(6)
Firms that avoided the financial crisis demonstrated comprehensive approaches to viewing firm
wide exposures and risk, sharing quantitative and qualitative data more efficiently across the firm
and more effective dialogue across the management team (8)
Successful firms have adaptive risk measurement processes and systems that can rapidly alter
underlying assumptions (such as valuations) to reflect current circumstances, wide range of risk
measures, more active controls over balance sheets, liquidity, capital, and aligning treasury
functions with risk management processes, incorporating information from all businesses into
global liquidity planning
The importance of stress testing the financial/banking system, stating that some institutions are
hesitant to implement forward looking giant price movements in stress testing (10-11)
There's an interesting point brought up that banks don’t follow the intent but letter of the law. For
example, Banks writing credit lines for 364 days as opposed to 365 to avoid support of bank
capital for conduits under basil I...but banks are essentially in the business of taking risk/making a
greater return in efficient, minimal, strategies (including working around the law). Depends on
how well law is written.
The report also cites an imbalance between control functions of financial firms unable to develop
critical scrutiny necessary for their role, and the expanding activities of the front office (risk
managers & traders) on page 12
From the macroeconomic perspective, monetary policy in many nations was expansive after
2000, the housing sector expanded. With low interest rates, investors searched for yield to the
relative neglect of risk perceived to be spread out in the entire financial system
The report suggests to align key executive and board remuneration with long term interests of the
company and shareholder (13)
Policy statements must outline relationship between remuneration and performance, as well
reasonable dichotomy between long run and short run interest firm considerations, specific to a
firms environment and function (whereas an improvement may consider long term and short
term interests of stakeholders and local community members, more specifically in so far that
"wasteful" remuneration or firm misconduct amounts to that which negates stakeholder,
shareholder and local community members from providing capital, maximum output from labor
productivity, and consumer profits from sales)
Firms with CEO's who had greater holdings in stocks were more vulnerable to risk
> That's an issue (agency problem) with the idea that directors holding stock is supposed to be an
incentive. It can be if directors value their shares and they're decent, but the more shares a director
owns, the less agency other shareholders have over that director, which (in theory) deteriorates the
enforcement mechanism that management (the director) is working in the best interest of shareholders
and their idea of risk, as opposed to management's idea of risk
Proposed Principles of Conduct for I. Compensation / Factors (15)
Long Run considerations
Shareholder considerations
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