Bank regulation, governance and the crisis

a behavioral finance view

Research output: Contribution to journalArticle

14 Citations (Scopus)

Abstract

Purpose – The purpose of this paper is to analyze the 2008-2009 financial crisis using a behavioral view, and suggest changes in government policy and company governance to deal with the key behavioral problems. Design/methodology/approach – Behavioral elements of the crisis are identified and explained, intermediaries involved in the crisis are reviewed, and both financial institution strategies and public policies are presented to deal with each element. Findings – The behavioral view of the financial market points out that over-optimism, anchoring, hubris and herd behavior are human attributes, and that future crises involving excessive credit extension will occur because of such non-rational behavior. Responses to these elements of the crisis focus on four points: overconfidence related to rising home prices; inability of the market to channel participant behavior in sustainable directions; inadequate financial institution management due to hubris and herd behavior; and inadequate regulation due to regulatory capture and information gaps. Practical implications – Policymakers must see that no policy can eliminate future crises, so they should focus on designing responses to the behaviors of market participants. Raising levels of capital adequacy will help convince the market that the environment is safer, but ultimately new crises will occur anyway. Policy should aim to pre-establish responses to those future asset price bubbles and market-failure conditions. Practitioners must recognize the realities of overconfidence and herd behavior, to design better management that will constrain overextension of credit and excessive risk-taking. Originality/value – A behavioral view has not previously been applied systematically to explain the crisis and to develop responses to it.

Original languageEnglish (US)
Pages (from-to)4-25
Number of pages22
JournalJournal of Financial Regulation and Compliance
Volume20
Issue number1
DOIs
StatePublished - Feb 17 2012
Externally publishedYes

Fingerprint

Bank regulation
Governance
Behavioral finance
Herd behavior
Overconfidence
Financial institutions
Hubris
Credit
Design methodology
Government policy
Regulatory capture
Capital adequacy
Asset price bubble
Financial crisis
Optimism
Politicians
Design management
Intermediaries
Anchoring
Market failure

Keywords

  • Behavioral view
  • Corporate governance
  • Financial crisis
  • Financial institutions
  • Financial regulation
  • Government policy
  • Regulation of financial institutions

ASJC Scopus subject areas

  • Finance
  • Strategy and Management

Cite this

Bank regulation, governance and the crisis : a behavioral finance view. / Grosse, Robert.

In: Journal of Financial Regulation and Compliance, Vol. 20, No. 1, 17.02.2012, p. 4-25.

Research output: Contribution to journalArticle

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