Corporate Governance and the Banking Sector

Author:Marc CANNIZZO

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Keywords:corporate governance; fraud; Sarbanes-Oxley; moral hazard; creative destruction; subprime; risk management

Abstract:
This is a discussion of the chapter on „corporate governance” contained in Alan Greenspan’s book „The Age of Turbulence” (which appeared in 2007). Greenspan is a former chairman of the US Federal Reserve Bank. He describes the evolution of the autocratic style of chief executive officer (CEO) in business. He largely criticizes the Sarbanes-Oxley Law as imposing unjustified costs on business, but acknowledges that it has some useful parts.\r\nGreenspan endorses the Anglo-Saxon corporate governance model as producing, on balance, the greatest economic benefits and cites the US postwar economic domination as illustration. He also endorses the beneficial use of the corporate takeover mechanism as a way to penalize incompetent managers and to allocate economic resources to more efficient uses. This is part of what he calls „creative destruction”, echoing the economist Schumpeter.\r\nGreenspan’s comments are discussed in light of recent problems in international banking (the subprime crisis and rogue trading) and within the context of moral hazard as it relates to the banking system. His suggested „remedy” is not completely satisfactory given the importance of (major) banks to the economic system and conflicting priorities of regulatory authorities, in particular with respect to moral hazard.\r\n\r\n

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