Thursday, 4 June 2009
Sir David Walker has been asked by the Chancellor to lead a review of corporate governance in the banking and finance sector.
Sam Robbins and I, for the Intellectual Business think tank, have co-written a submission to this review which examines the moral hazard created by limited liability, and how bounded rationality interferes with ordinary market discipline to create risks specific to the sector. One particular conclusion is that the principal-agency problem that has supposedly led to bankers taking advantage of their innocent shareholders is nonsense. In fact, the nature of bank equity holdings specifically encourages risk-taking, and bank executives who made high-risk investments were acting precisely how their shareholders wanted them to.
Interested readers are very welcome to download a copy of the document:
Download Walker Review submission
It's a little more dry and technical in tone than some postings here, but is intended to be quite readable. Your feedback would be welcome.