This website uses cookies to ensure you have the best experience. Learn more

A Discussion About The Failure Of Financial Engineering And Corporate Governance As A Cause Of The Global Financial Crisis

1494 words - 6 pages

In this paper, an analysis of how the failures in financial engineering and Corporate Governance have been closely related with the recent Global Financial Crisis is carried out.

The Real Estate Bubble in 2006 leaded to the Subprime Mortgage Crisis in 2007 which expanded from the United States to the whole world generating the biggest financial crisis since the Great Depression of the 1930s. There are multiple factors that originate a crisis like this, and will be explained and analysed later, but in order to understand the global economic situation it is necessary to understand how the changes in the Corporate Governance have been one of the reasons of this and how this changes have been ...view middle of the document...

The two biggest examples are the deregulation of the mortgages in the 80s and the end of the division between commercial banking and investment banking in the 90s. After this, the Corporate Governance of financial companies changed to adapt to the new markets that they were now able to cover.

Regarding the liberalization of the economy, once again the Corporate Governance of the companies needed to change in order to fit the variation in the policy concerning the reduction in the barriers to the free transit, which was inevitably implemented in order to allow the Financial Globalization, and can be sometimes considered as a source of instability.

Either way, both the reduction in the regulation of the banking system and the liberalization of the economy leaded to the Financialization of the Economy, understood as the process in which financial markets take a bigger relevance over the primary and secondary sectors of the economy. Once again, this has consequences in the Corporate Governance of the different companies because of three different factors:

With the decrease in the intensity of the regulations, now all the parts involved in the financial markets can move their assets from one place to another more easily.

After the clear limits between Investment Banking and Commercial Banking disappeared in the 80s, new sorts of institutions that manage different markets at the same time have appeared.

The collective investment schemes, through investment management groups, have increased their relevance in the executive boards of the companies they own.

These factors have been the natural consequence of the Financialization of the economy and have therefore resulted in a Change in the Corporate Governance of the Financial System.

There are five major changes in the Corporate Governance that can be highlighted as a result of the increased relevance of the financial markets in the global economy: an inadequate risk assessment, the new ways to economically motivate executives, the artificial increasing of the share value, the shareholder approach and the lack of long-term perspective.

Regarding the inadequate risk assessment, over the last decades it has become clear that the right risk management policies have been lacking in the main financial corporations. The increased risks that the different companies have taken have proved to be a result of the lack of the proper control tools and regulations, enabling a bigger uncertainty.

Regarding the new ways to motivate executives, the increased percentage of the salary coming from variable incentives and flexible benefits has created a situation in which the division between the leading managers and the executive board is sometimes difficult. Additionally, the benefits were based on the actual results of the company, but not so much in the risks that had been taken to guarantee those immediate results. Furthermore, their bonuses are usually related to the benefits and do not share the risks of the...

Find Another Essay On A DISCUSSION ABOUT THE FAILURE OF FINANCIAL ENGINEERING AND CORPORATE GOVERNANCE AS A CAUSE OF THE GLOBAL FINANCIAL CRISIS

The Global Financial Crisis and Its Impact

2217 words - 9 pages 1.0 The Global Financial Crisis and Its Impact The recent Global Financial Crisis (GFC) initially began with the collapse of credits and financial markets, which caused by the sub-prime mortgage crisis in the US in 2007. The sub-prime mortgages were given to high-risk lenders (with bad credit history) who were in danger of defaulting, which eventually caused a global credit crunch, where the banks were unwilling to lend to each other. In

The impact of the global financial crisis on Chinese economy

3304 words - 14 pages grew more than 10% every year. And about 40% of the GDP growth should be contributed to the external demand. In 2004, it reached the highest level of 48.8%. As a conclusion, this results show that Chinese economy has been highly integrated with the world economy. The slowing down of Chinese economy due to the global financial crisis Yuqing Xing (2009) suggested that exports and FDI inflows are two major channels for external shocks being

Failure of Three Regulation in Financial Crisis

1838 words - 7 pages international), and a global financial system, because of the poor corporate governance and misguided intervention in the U.S housing market. Next, the failure of financial risk management caused unlimited risk transfer in global financial market. In general, the global financial market may not be controlled directly, because of a large number of investors from the globe invested money to the same financial market. Particularly, financial products had

The Impact Of Global Financial Crisis On The United Kingdom

2669 words - 11 pages life. People can live better than before. It is obvious that the number of the population and life expectancy has been rising and infant mortality has been falling since the NHS was established.   According to the table 1.1, the population of UK rose from almost 56 million in 1971 to over 61 million in 2008, which was a remarkable increase of about 5 million people since introduction of the National Health Service between 1971 and 2008. As

The Impact Of Global Financial Crisis On The United Kingdom

7067 words - 28 pages is obvious that the number of the population and life expectancy has been rising and infant mortality has been falling since the NHS was established.According to the table 1.1, the population of UK rose from almost 56 million in 1971 to over 61 million in 2008, which was a remarkable increase of about 5 million people since introduction of the National Health Service between 1971 and 2008. As the table 1.1 shows, there was a change in different

Financial Crisis of the 1980s

1094 words - 4 pages during the period that also help to fuel the banking crisis at the time. People who have inside trading information compromise their trust and gave information to those that were not suppose to be provided with such sensitive information as a results impacting on trading and causes a lot of loss to so many of these financial institutions at the time. So many people including financial analysts believe as explain above to be the fundamental

Repercussions of the Financial Crisis

960 words - 4 pages products to other better-placed companies. This results in lesser profit and adds further to the vicious cycle. Overall, I feel that the financial crisis is definitely able to be prevented. If not for the bankers’ greed, none of these would have happened. If the bankers had lost their jobs, they can’t blame anyone else as they had brought it upon themselves. They should have gauged the financial ability of the people who were taking the loans

Factors That Influenced the Global Financial Crisis of 2008

631 words - 3 pages Since the years of the great depression in the 1930s, the global financial crisis of 2008 is arguably the worst to have hit the world. The crisis began with the escalation of prices in the property market creating a liquidity crisis. It had massive consequences in varying sectors of the economy. The financial, property and mortgage sectors were hit hard by the crisis. Large financial institutions collapsed while stock markets experienced

A Brief History of IMF programs in Turkey and The Reasons Behind Their Ineffectiveness with The Analysis of 2001 Financial Crisis as an Example

1705 words - 7 pages policies. 5 Evrensel, Ayse Y. "IMF", p14. 6 Miller, Calum. "Pathways through financial crisis: Turkey." Global Governance: A Review of Multilateralism and International Organizations 12, no. 4 (2006): p456. 7 Miller, Calum. "Pathways", p457. Second of the underlying reasons was the moral hazard associated with IMF stabilization programs. As Turkey received more and more loans through standby arrangements, Turkey's macroeconomic managements became

The contemporary Great Recession and the global financial crisis

953 words - 4 pages , psychologists, anthropologists and other experts in academic, financial, economic and other fields of research are still analysing the contemporary global financial crisis. There is ample information on the new world recession, and upcoming documentations are bringing new knowledge on this newsworthy issue and topical research subject. While some researchers are focusing on the recession at national levels such as on the economy of the United

The Problem with Banks and the Global Financial Crisis 2008

1128 words - 5 pages themselves for the future. The system of banks, promotes the consumption and therefore improves the economy of the country. However, banks also hold a great risk. The Global Financial Crisis in 2008 was caused by the decline of the bank the “Lehman Brothers Holdings Inc.”, because the costumers could not repay their debt to the bank. The decline of one bank often leads to the decline of other banks, because banks interact with each other by

Similar Essays

The Global Financial Crisis Essay

2812 words - 11 pages sellers have asymmetric in order. The strength of the financial structure is one of the major concerns of the central banks as the latest global financial crisis illustrate, financial system disruption can activate a pointed reduction in economic movement, damage the communication of monetary policy and weaken the well-organized portion of capital. The bad products or service are additional probable to be chosen. In adverse selection when bank

The Global Financial Crisis Essay

618 words - 2 pages in bailout packages and plans. An article on globalissues.org calls it “A Crisis So Severe, Those Responsible Are Bailed Out”. However, as easy as it is to blame the banks or the government, there is a missing idea in the protester’s ideology. This problem verily could have been averted. During the course of the 1990s and early 2000’s specialists in the financial fields had been highlighting these issues. Yet, it is a well-known fact that in

The Global Financial Crisis Essay

1000 words - 4 pages The global financial crisis has brought wide-ranging changes to consumer spending behaviour and consumption patterns throughout the world with the economic downturn impacting on the spending and purchasing power of people. The findings of a study conducted by Booz and Company in 2008 on consumer spending behaviour revealed that, firstly, the unprecedented confluence of the dramatic rise in oil prices, the substantial deterioration of housing

The Global Financial Crisis And The Regulation Of Investment Banks

1271 words - 6 pages Lessons of GFC for the regulation of Investment Bank Investment Banks enable individuals, institutions such companies, governments to raise capital by offering underwriting services or working as an agents of the client in offering securities or in both roles. Investments banks play a very important role in stimulating investments in the United States both from individuals and corporate. The global financial environment has over the last