Lessons for the Management of Financial Institutions

1. The Global Financial Crisis

As with any war, crisis or other historical event, the most important thing to do is to learn from it and ensure history isn’t repeated. The global financial crisis of 2007/8 has provided those who seek, with many well worth lessons to be learnt. The four most important of these lessons are discussed in detail in this report, as they relate to various key stakeholders in financial institutions.

In the past two years the financial sector has witnessed many high profile corporate bankruptcies and hundreds more smaller insolvencies. This financial crisis has been noteworthy due to the global scale and impact of these bankruptcies despite the increasing levels of international regulation, such as Basel, and advancements in financial modelling. The lessons discussed within are discussed with regards to preventing future episodes of mass insolvencies.

2. Chairman of the Board of Directors

Financial services firms are unique in that its employees are one of its most important assets, they are the revenue drivers. All employees must be rewarded for their effort and it is a typical fashion in the industry to reward employees who have performed, with a bonus. The design of the remuneration structure is crucial in determining the attitudes the employees will take on.

It is the duty of the board of directors and the chairman to ensure the interests of the employees & management of the company are aligned with that of shareholders. However, recent remuneration structures of financial institutions have achieved anything but this. It has been argued that excessive risk taking encouraged by inappropriate remuneration structures played a key role in the financial crisis. This demonstrates the importanc...

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...ial services is a fast changing one and if prudential regulators fail to keep the regulation up to date, institutions will attempt to exploit them and may result in negative consequences for companies and their customers.

Works Cited
“Corporate Governance Lessons from the Financial Crisis”, OECD

“Enhancing Market and Institutional Resilience”, Financial Stability Forum

“Lessons from the financial crisis”, Willem Buiter, Financial Times

“Of couples and copula’s”, Sam Jones, Financial Times

“Credit Derivatives Got a Boost from Clever Pricing Model”; Wall Street Journal

“Three ways to reform bank bonuses”, D. Heller, Financial Times

“Lessons of the Financial Crisis for Banking Supervision”, Ben S. Bernanke

“Final Report of the IIF Committee on Market Best Practices: Principles of Conduct and Best Practice Recommendations”, Institute of International Finance