Addressing the next financial crisis

In the wake of the 2008 financial crisis, many are asking what measures in terms of governance and regulation can be taken to avoid or at least mitigate another crisis in the future.

But says Professor Colin Mayer of Oxford University’s Saïd Business School, the central problem is the systemic issues that led to the last crisis have yet to be resolved.

“The fundamental problem that emerged in the last crisis was of a systemic nature – the risk that the failure of one institution could bring down another and the failure of one institution causing the closure of many financial markets,” he said.

Professor Mayer was speaking at the annual conference of the Centre for Governance, Institutions and Organizations (CGIO) at NUS.

In his keynote address, he said that after that systemic failure, trust in bankers and regulators is in short supply. Inevitably that’s led to even more regulation, especially regarding corporate governance.

Public voice

As examples, he pointed to the UK’s Financial Reporting Council recommendations to strengthen corporate governance, the European Commission’s “green papers” on corporate governance, the Singapore Corporate Governance Council’s proposals on board independence, and the United State’s Dodd-Frank Act passed in 2010 which includes regulations for financial reform and new corporate governance requirements.

The reforms fall into three general categories. One has to do with board composition and operation; another focuses on risk management; and the third has to do with communication – not just executives communicating to shareholders but shareholders exercising control through more direct engagement with the board.

Furthermore, Professor Mayer says the public should have a say in what should be the primary function of the banking system within their country.

He says it’s reasonable for different countries to conclude they want their banking systems to do different things.

“In the UK we place a great deal of emphasis on people owning their own houses,” said Professor Mayer.

“And in some countries that is of much less significance than in the UK. In ‘developing country’ context it may be very important to promote particular types of industrial development and insure that the banking system is well placed to do that.”

Even as these reforms are being implemented within countries, Professor Mayer says what’s really needed is a more coordinated system to protect financial systems as a whole, rather than protecting individual banks and institutions.

Without it he says the next financial crisis would be even more serious because countries that bailed out their financial systems the last time around will not be in a position to do it again.

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