Banking, Corporate Governance and the 2007 Financial Crisis

Banking, Corporate Governance and the 2007 Financial Crisis Throughout the world, by the end of 2008, many banks had seen most of their equity destroyed by the crisis that started in the US subprime sector in 2007. Yet, not all banks across the world performed equally poorly. In this paper, we investigate how banks that performed better during the crisis, measuring performance by stock returns, differed from other banks before the crisis. Academics, journalists, and policy-makers have argued that lax regulation, insufficient capital, excessive reliance on short-term financing, and poor governance all contributed to making the crisis as serious as it was. If these factors did contribute to making the crisis worse, we would expect that banks that were more exposed to these factors performed more poorly during the crisis. We investigate the relation between these factors and the stock return performance of large banks during the crisis, where large banks are defined as banks with assets in excess of $50 billion in 2006. With our definition of la rge banks, 32 countries had at least one large bank and our sample includes 164 large banks from these countries. Many analyses of the crisis emphasize the run on the funding of banks that relied on short-term finance in the capital markets for a substantial fraction of their financing (see, for instance, Adrian and Shin, 2008, Brunnermeier, 2009, Gorton, 2010, and Diamond and Rajan, 2009). We would expect banks that rely on short-term finance before the crisis to perform worse during the crisis. We find that this is the case with two different approaches. First, we find strong evidence that banks that relied more on deposits for their financing in 2006 fared better during the crisis. Second, following Demirg ¨ ucKunt and Huizinga (2010), we use a measure of short-term funding provided by sources other than customer deposits. We show that performance is strongly negatively related to that mea-sure both for the sample of large banks and the sample extended to include large financial institutions that are not depository banks, such as investment banks. These analyses also emphasize how losses fo rce banks to reduce their leverage, perhaps through fire sales of securities, and how this effect is greater for banks with more leverage. We find that large banks with less leverage in 2006 performed better during the crisis. An Organization for Economic Co-operation and Development (OECD) report argues that ‘‘the financial crisis can be to an important extent attributed to failures and weaknesses in corporate governance arrangements’’ (Kirkpatrick, 2008). More recently, the National Commission on the Causes of the Financial and Economic Crisis in the United States concluded that ‘‘dramatic failures of corporate governanceyat many systematically important financial institutions were a key cause of this crisis.’’ (The Financial Crisis Inquiry Report, 2011, pp. xvii). Some academic studies also emphasize that flaws in bank governance played a key role in the performance of banks (Diamond and Rajan, 2009, and Bebchuk and Spamann, 2010). The idea is generally that banks with poor governance engaged in excessive risk taking, causing them to make larger losses during the crisis because they were riskier. We use two proxies for governance. The first one is the ownership of the controlling shareholder in 2006. The second one is whether the bank had a shareholder-friendly board. To the extent that governance played a role, we would expect banks with better governance to have performed better. It is generally believed that greater ownership by insiders aligns their incentives more closely with the interests of shareholders. However, a powerful controlling shareholder could use control of a bank to benefit other related entities, so that it is not necessarily the case that greater ownership by the controlling shareholder means better alignment of interests of management with shareholders. Some limited evidence shows that banks with higher ownership by the control-ling shareholder performed better. In contrast, a strong and unambiguous relation exists between the extent to which a board was shareholder friendly in 2006 and a bank’s performance during the crisis. Banks with a share-h older-friendly board performed worse during the crisis. The hypothesis that the crisis resulted from excessive risk taking made possible by poor governance would imply the opposite result, so that our evidence poses a considerable challenge to the proponents of that hypothesis. We also investigate whether banks with better governance were less risky in 2006 and find no evidence supportive of that hypothesis either. Banks with more shareholder-friendly boards had a lower distance to default in 2006 but did not have higher idiosyncratic risk or higher leverage than other banks. Like Laeven and Levine (2009), we find that banks with higher controlling shareholder ownership are riskier, as these banks had greater idiosyncratic risk and a lower distance to default before the crisis. Governance and board characteristics are endogenously determined (see, e.g., Hermalin and Weisbach, 1998). In the context of our study, an important form of endogeneity stressed in the literature seems to have little relevance. Though taking into account the possibility that good governance could be caused by expectations about future outcomes generally is important, the banks with more shareholder-friendly boards are highly unlikely to have had such boards because they anticipated the crisis and expected to require better governance during it. At the same time, the concern that governance is significantly related to performance because it is associated with unobserved bank characteristics is important in the context of our study. In fact, the existence of such a relation is the only way to explain the results we find. In other words, shareholder-friendly boards created more value for shareholders through their decisions before the crisis, but during the crisis these decisions were associated with poor outcomes that could not be forecasted. For this explanation to work, these risks must not have been captured by traditional measures because accounting for these measures does not eliminate the relation between governance and performance we document. An example that could explain what we find is that banks with more shareholder-friendly boards invested more aggressively in highly-rated tranches of subprime securitizations. Such investments did not appear risky in 2006 by traditional risk measures, but they did work out poorly for the banks that made them. An alternative explanation for our results is that certain banks optimally chose more shareholder-friendly governance before the crisis because they were exposed to risks that required more independent board monitoring. With this view, the risks were not chosen by the board but instead led to the choice of a shareholder-friendly board. These risks had adverse realizations during the crisis, but because the banks had a shareholder-friendly board, they performed better than they would have had otherwise. With this explanation, banks with good governance had poor returns because of the risks they had, but they would have had even lower returns had they had worse governance. Governance is negatively related to performance in this case because it is correlated with risks that had adverse realizations, but it led to better performance nevertheless. Though we find some support for the latter explanation, neither explanation is consistent with the view that po or bank governance was a first-order cause of the crisis. We use the 2008 World Bank survey on bank regulation to examine the hypothesis that lax regulation led banks to take excessive risks that caused large losses during the crisis (see, e.g.,Dooley, Folkerts-Landau, and Garber (2009), Stiglitz (2010)). We use indices for the power of the regulators, oversight of bank capital, restrictions on bank activities, and private monitoring of banks. There is no convincing evidence that tighter regulation in general was associated with better bank performance during the crisis or with less risky banks before the crisis. In all our regressions, only the index on restrictions of bank activities is positively related to the performance of banks during the crisis.Barth, Caprio, and Levine (1999) show that the banking system is more fragile in countries where banking activities are more restricted. However, some observers, perhaps most visibly the former chair-man of the Federal Reserve System Paul Volcker, have blamed the difficulties of banks during the crisis on their activities not related to making loans and taking deposits. Though we find that large banks in countries where bank activities were more restricted suffered less from the crisis, no evidence exists that such restrictions made banks less risky before the crisis using common measures of risk. Most likely, therefore, to the extent that restrictions on bank activities are associated with better performance of banks during the crisis, it is because traditional bank activities were less exposed to the risks that turned out poorly during the crisis than were newer or less traditional bank activities. In addition, we find that stronger regulations for bank capital were associated with less risk before the crisis. Given the attention paid to the moral hazard resulting from deposit insurance, we investigate whether banks in countries with a deposit insurance scheme performed worse and find no evidence supportive of this hypothesis. However, banks in countries with formal d eposit insurance schemes had higher idiosyncratic risk before the crisis. If banks are impeded from making loans because of poor financial health, economic growth is weaker. It is therefore important to understand whether the variables that help predict returns during the crisis also help explain loan growth. In a related paper,Cornett, McNutt, Strahan, and Tehranian (2011)find that US banks with more exposure to liquidity risk experienced less loan growth during the crisis. We have a much smaller sample than they have, so that our tests do not have as much power as theirs and are less definitive. Nevertheless, we find evidence that is supportive of their results on an international sample composed of much larger banks than the typical bank in their study. Banks with more shareholder friendly boards have lower loan growth during the crisis. Finally, a strong positive relation exists between loan growth and restrictions on bank activities. We also estimate regressions excluding US banks. With these regressions, we can evaluate whether the worse performers were banks from countries where the banking system was more exposed to the US according to the Bank for International Settlements (BIS) statistics. These regressions allow us to assess whether holding US exposures was a contagion channel [see, e.g.,Eichengreen,Mody, Nedeljkovic, and Sarno (2009)for the view that assets were a contagion channel]. We find that banks from countries where the banking system was more exposed to the US performed worse. Our main results hold up in a variety of robustness tests. Our study is limited by the data available. Ideally, we would like to have data on the nature of holdings of securities by banks. However, such data are generally not available. Another limitation of our study is that, in the fall of 2008, countries stepped in with capital injections and other forms of support of banks. Such intervention might have distorted returns. Yet, our results generally hold for returns measured from mid-2007 to just before the Lehman Brothers bankruptcy in September 2008. Moreover, Panetta, Faeh, Grande, Ho, King, Levy, Sigboretti, Taboga, and Zaghini (2009) show that the announcement of rescue packages did not have a positive impact on bank stock prices across countries. We estimate our regression that includes the indicator variable for whether the board is shareholder-friendly for a sample that includes investment banks and other financial institutions not subject to the Basle Accords (i.e., financ ial institutions that do not report Tier 1 capital and are not subject to the regulations forming the basis for our regulatory variables). We find that our results hold for that sample. The paper proceeds as follows. In Section 2,we introduce the data that we use. In Section 3, we examine how the performance of banks during the crisis relates to governance, regulation, balance sheet composition, and country characteristics other than regulation. We also show how these attributes are related to bank risk before the crisis. We conclude in Section 4.

My Name Is Chimezirim Amadi

Being the Curious four year old that I was, I darted reading the dictionary not even knowing what the words said or meant. The reason I did that was because I liked looking at the words, wondering what It said, I was too preserved to ask anyone to teach me how to read, so I tried to teach myself. I never wanted anyone to see me reading because I did not understand anything I was reading. At night when everyone went to sleep, I snuck out of my bed, went and got the dictionary, and started looking and reading the words out loud one by one. One night I snuck out, and my father heard a little voice talking.He snuck over behind me ND asked what I was doing. I tried to hide the dictionary but he grabbed it and asked what was I doing with it, I was stunned and speechless, I was so speechless that I started mumbling. I mumbled all the way to my room. The next morning, right before he went to work he told my mom what happened. My mom decided to sit me down and ask me about the situation, fina lly I was ready to face the truth. That was when I told her, I wanted to learn how to read. She smiled and told me I did not have to be shy about It, so she bought me some easy to read books with pictures and theseHUGE words. It was excellent to read books with so much art. I loved reading and everything thing about it, so much that by the age of eight I started making my own fiction books. First I told my mom to buy me a big composition book with brand new colored pencils, crayons and markers so that I could make an Illustrated book, she said no, I should Just use blank paper and the art supply I already had. I begged her so many times and I kept getting the same answer â€Å"NO†. When my dad came home from work. Asked him and he said yes, so he took me to Wall-Mart and bought me a full set.I as so excited to make my own book. But the only thing was that I could not really think of anything to write about. I sat in my room for twenty minutes thinking, so I started drawing th is huge monster and that was when I figured out what my story line was. I loved to write and draw, so every year until the age of thirteen, I made an Illustrated book. When I was thirteen, there was a contest for junior writers and whoever won the contest gets five hundred dollars. Immediately when I heard of the contest, I joined. The end result was that I lost.I was so disappointed in myself cause I thought I was a good writer. Even though I did not win, my teacher read my story and gave it to the Literary Magazine In my school and they loved It. They put It as a flirt page story so that everyone can see what a great writer I was. I did not think I was a good writer after I lost that contest, even though I did make 1 OFF stories. I thought I was not going to write for pleasure again, until I got to sophomore year of high school. When I became a sophomore, I Joined the year book club. Our teacher assigned each person a Job to do.I really wanted to be the one to take all the strictu res, but she decided to put me in charge of writing the cover letter and some photo captions. I told her that I was a terrible writer and she should reassign me, but she disagreed. I stalled on writing the cover letter for two months because not only could I not think of anything to write, but I did not want to write for pleasure. One boring day, I decided to sit down and write my cover letter, It went from it being a requirement to pleasure. When I started writing the cover letter, I could not stop.I had so many ideas running through my head that I Just kept writing and it felt good. The next day I handed the cover letter to my teacher, she read it and she thought it was remarkable. It was so remarkable that she had to read it to the whole class. I felt like I accomplished something. My senior year of high school, we started learning about Shakespearean most extraordinary play, Hamlet. The longest play Shakespeare ever wrote and also one of the greatest story in English literature. The story of Hamlet is about a prince who grieves of his father's death.His mother Queen Gertrude marries his uncle Claudia, who killed his father. The ghost of the late king kept appearing to Hamlet to tell him that Claudia poisoned him in the garden so that he could become king. Hamlet decides to get revenge on his uncle. He killed Polonium because he was eavesdropping. Aphelia, Polonium's daughter drowns herself because Hamlet drove her to madness with his confusion of his love for her. Polonium's son Alerts returns to Denmark for revenge of his father and his sister's death. A battle took place in the castle, to end with the death of Hamlet, Gertrude, Alerts, and Claudia.Hamlet was such an influential play to me because Hamlet was hell bent on revenge and his wit and determination reminded me of myself. I was so influenced, for my senior paper in high school, I wrote a 21st century story similar to Hamlet. English as a subject has had an ongoing role in my life. From Reading th e dictionary and not knowing anything it said, to making my own illustrated stories and to Just writing for pleasure. English has had a remarkable influence in my life. I always had a personal connection with English since my childhood to the present.

Ikea Strategic in Action Essay

Part strategic position and strategic choice which mention above are underlining company environment, capability, and its strategy. Strategy in action will consider on how strategy act in organisation (Johnson et al., 2011a).This part of report will evaluate them considering their suitability. Evaluation IKEA strategies regards Suitability Suitability refers to the strategy is used to evaluate whether the strategies address the key ‘opportunities’ and ‘constraints’ underlined by the organisation’s strategic position (Johnson et al., 2008). This criterion can be examined by checking the strategic options against the environment, capabilities and the stakeholder expectations. Therefore, the analysing of PESTEL, Five Forces and strategic capabilities of IKEA in section above will be helpful for evaluating and understanding suitability. It appears that suitability is used to evaluate whether overall rationale of strategy is suitable in terms of environment and capabilities and stakeholder expectations or not. Therefore, this part of report not only evaluates IKEA strategies and capabilities regard in suitability but its successes and difficulties will be analysed. Firstly, from PESTEL analysis, IKEA takes advantage from ‘hybrid’ and ‘cost leadership’ strategy to response to its environment. IKEA’s products are cheap and differentiate; these are good opportunities to survive in economic recession. Additionally, IKEA’s core customers (middle class with moderate disposable income) are affordable to buy products even if in economic recession. Moreover, IKEA capabilities are strong global brand and low cost products with flat packaging which is its core resource and competence. Combining its capabilities and its strategies will benefit IKEA to achieve in environment changed and competitive circumstance. However, the difficulty is about import issue. All IKEA normally sources products from the same places in order to keep it standard. However, in some countries the import taxes are very high. For example in China, the import taxes on products from Poland to China are up to 22% (Burt el al., 2011). However, to stand its low price strategy and survive in China market, IKEA overcome this difficulty by sourcing goods from local country to reduce cost of taxation (Burt el al., 2011). In overall, it can be seen that in these circumstances and environmental change, the strategies IKEA has been used is a good opportunities to overcome those threats and suitable in its environment. Secondly, from Five Forces analysis, IKEA strategies and its capabilities can go along with external environment very well. It is normal that buyers are looking for cheap products but high quality. IKEA strategies are support customer needs. Furthermore, IKEA unique resources such as strong brand combining with its ‘hybrid’ strategy will maintain existing customers and gain more new buyers. In a term of power of supplier, IKEA’s strategies are suitable to supplier expectations. To generate low cost products, IKEA has to reduce cost of sale per unit by purchasing a large volume of material s from supplier. As well as suppliers, they also want to sell their products as much as possible. Moreover, considering in threat of new entry, IKEA strategies and capabilities are difficult for new entrants to compete. These are the reasons why IKEA takes opportunity from its strategies and capabilities among these threats. In addition, in the rivalry situation, it can be assumed that whether other companies offer low cost products but its quality, design, and brand image may not be the same as IKEA. IKEA considers in quality as well as the price. However, in high competitive markets, IKEA may face difficulties. For example in China which local products are normally cheap, IKEA low price strategy may not attract to this market. Giving a suggestion, in order to offer only low cost products, IKEA should build brand image as a high quality brand and offer Swedish-designed product which differentiate in Chinese customer perception. In overall, it appears that IKEA capabilities and its strategies are suitable to compete in the rivalry situation. IKEA generates its strengths and overcome the weaknesses in a suitable way. Thirdly, evaluation of suitability of IKEA strategies and capabilities according to Ansoff analysis of 4 possible development directions will be examined. The suitability will be evaluated whether these options will match to future scenario. The future scenario which matches in a term of economical environment is predicted that the world economy will maintain very weak in 2013 and slightly decrease between 2014 and 2016 (The Guardian, 2012). Apart from evaluation the suitability of IKEA strategies and capability, the suitability will be used to assessment whether IKEA strategic options meet the stakeholder expectations (Johnson et al., 2008). Table 5 Evaluation of suitability – Direction of growth In overall, IKEA strategies and capabilities are suitable in the environment and meet the expectation of stakeholders. Market penetration may be the most appropriate direction that IKEA should carry on at the present time to the future scenario predicted. There is no major investment needed. The IKEA current strategies and its capabilities is now effective under this circumstance. However, there is a difficulty in IKEA’s strategies. IKEA is a global company which generates same strategies almost every market called one-size-fit-all approach (Stern, 2012). Although, one-size-fit-all approach will benefit IKEA to control it global strategies easily, the difficulty will occur. The problem is every market is all difference. The one-size-fits-all approach on all IKEA staff and customers is good to share the same value but for all market is not suitable. The different markets have different circumstance. For example, according to Anders Dahlvig cited in Stern (2012), the differences between countries were great in China and Sweden. China is different territory. Chinese labour policies are poor for IKEA co-worker vision. Chinese workforce depends on the authority of the boss which is difficult to adapt to the more free and easy way of the new employer (Stern, 2012). Moreover, in the future, if IKEA wants to expand their market and make the differentiation, the policy and restriction in some countries may be serious such as in Islamic countries, and the differentiation needs lots of investment and knowledge. IKEA should consider how to stay the low price while a lot of investment is needed.

The Fossil Fuel Coal Essay - 1914 Words

Coal, an amazing fossil fuel Abstract Coal has had a tremendous effect on the world. It produces the most electricity when compared to other fuels. The US generates more than half of their electricity from coal. This black or brownish†black fossil fuel, formed by the energy in plants hundreds of millions of years ago, is made up of mostly carbon, hydrogen, and small traces of other elements like sulfur. Coal has four main types of categories. Mining is the method used to extract coal from underneath the ground. After coal is mined, it needs to be processed in order to increase its heating value. These sedimentary rocks are excellent in producing energy, but they also pollute the environment and increase global warming. With all of†¦show more content†¦First, coal is grinded down into thin powder by a pulverizer. The coal, mixed with hot air, is burned to heat up water. This creates steam, which powers a turbine to generate mechanical energy by spinning. Then, the turbine powers a generator to make electric energy. Steam cools down through a condenser and converts back into water. Water is heated up again, and the process repeats. These turbines usually waste 65% of coal’s energy in the form of heat into the surround environment. Newer designs are being constructed to make it more energy efficient. Steam engines work similarly according to this process. Coal has been around ever since the caveman times. It is a black or brownish†black fossil fuel, and is a mixture of carbon, hydrogen, oxygen, nitrogen, and sulfur. Giant plants started the creation of coal. After their deaths in swamps, water and dirt start to build up on them. Millions of years are needed to create this nonrenewable energy source. During this long period of time, heat and pressure turn the dead plants into coal. The energy inside coal comes from the energy in plants. There are four main types of coal. They are based on the carbon and magnitude of heat energy it can create. Lignite, a type of coal with the least amount of energy, is usually the newest accumulation and has not experienced extreme heat or pressure. It is crumbly and has a lot of moisture. Twenty five to thirty five percent of it is carbon. This type of coal, also knownShow MoreRelatedCoal Is A Fossil Fuel1705 Words   |  7 PagesCoal is a fossil fuel and is the result of altered remains of prehistoric vegetation that originally accumulated in swamps and peat bogs. The material that formed fossil fuels varied greatly over time as each layer was buried. As a result of these variations and the length of time the coal was forming, several types of coal were created. Depending upon its composition, each type of coal burns differently and releases different types of emissions. 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