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Bank CEO Incentives and the Credit Crisis

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A credit crisis can also be identified as a shortage of available credit for businesses and consumers. Also known as the credit crunch, these credits may be in the form of personal loans, company loans or credit cards debts. In the past, the term credit crisis was only familiar to people that are involved in the financial sector, but since the occurrence of the 2007-2009 credit crisis in the United States, this term has became a common saying among all walks of life.
The credit crisis has affected the lives of many people. The fall of the property market with high foreclosure rate and default loans has made it harder for businesses to expand. The lack of liquidity has also forced business owners to reduce their expenses. In order for businesses to survive in this competitive market, managers were forced to make radical changes which include laying off employees. Since it has been harder for the people to finance their loans, when the unemployment rate increased, the default rate on loans has also increased, thus this has led to an economic slowdown. (Lorrette, 2013) Apart from that, the credit crisis has also affected the productivity of firms as the process of production was disrupted due to the limited availability of funds. (Akiyoshi and Kobayashi, 2010)
There were a few causes to the credit crunch, one of the most debated issues was “Bank CEO Incentives were the major factor in the credit crisis”. The topic which has been debated by academic experts on “World Bank All about Finance Blog” has provided an insight to the people in the financial field. (Luo and Song, 2012)
According to their research, Rene M. Stulz and Rudiger Fahlenbrach disagree with the statement above. The authors argue that Bank CEOs have taken actions that...

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