April 25, 2013
The Financial Crunch of 2008 has filled the air of the globe with much apprehension regarding the financial system of countries. Much research has been conducted as to the factors contributing to the crisis and most of the evidence points towards factors related to financial institutions as the major contributors. In a nutshell high borrowing with less or no monitoring has been attributed to the crisis.
This article takes a panoramic view of the financial system of the U.S in order to suggest remedies for the destruction caused by the crunch and also improve the financial system. The reasons have been segregated into three broader aspects namely governance of financial institutions, information disclosure by financial institutions and the role of market participants and government in bringing about a development in the financial system.
The article takes its start from drawing a picture of a good financial institution. Here, the author has briefly described all the solutions of problems faced by the system. For instance, it says the principal-agent problems between the management can be resolved by making them as responsible as possible for value maximization of business association. Although it is often observed that the empirical results are mingled but such value maximization is crucial for resolving the problems facing poorly managed firms. Similarly equity-based compensation as well as market for corporate governance plays an important role in enhancing the management and aligning interests of stakeholders.
The article then goes on to explain corporate governance as a vital tool for success of financial institutions just like non-financial ones. It says that for the governance of financial institutions, it is important for the body to possess both skills and willingness to do so which comes from The Board of directors who are the key players in giving directions to these institutions... [continues]
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