By Zamir Iqbal
Abstract
The sub-prime financial crisis was not simply the result of excessive leverage and inadequate capital but it was brewing for some time as a result of a gradual deterioration of business leadership, of lapses in governance and in the regulatory framework (particularly in derivatives markets), and of an ineffective risk-management framework. There is consensus among researchers that the regulatory and supervisory framework was not adequate to the task of forecasting and preventing the crisis. However, the crisis has highlighted several regulatory and governance related issues: the market discipline mechanism proved to be too weak; the decision-making of corporate leaders was overly driven by short-term goals; trust in corporate leadership declined; corporate boards were slack in their oversight and risk control; business ethics and values were compromised; risk management and supervision failed due to narrow view; the quality of bank supervision was compromised; and finally, the corporate incentive and remuneration system was questioned.
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