This paper is a comparison between the current financial crisis and the asian crisis from 1997/98. The author argues that one of the main reasons that caused both crisis were flawed incentives. The paper was a basis for a class discussion, hence it is strongly focused on this argument.
Inhaltsverzeichnis (Table of Contents)
- Flawed Incentives Cause Banking Crises
- The Current Financial Crisis
- The Asian Currency and Financial Crisis
- Personal Statement and Outlook
Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)
This paper aims to demonstrate how flawed incentive systems have contributed to the current financial crisis and the Asian financial crisis of 1997-1998. The paper explores the specific incentives in place during these crises and how they incentivized individuals to take actions that ultimately led to systemic instability.
- The role of flawed incentives in financial crises
- The impact of short-term bonuses on risk-taking behavior
- The influence of government incentives on foreign investment and lending
- The consequences of incomplete agency regulations
- The importance of risk management and long-term orientation in incentive structures
Zusammenfassung der Kapitel (Chapter Summaries)
- The Current Financial Crisis: This section examines the role of flawed incentives in the recent financial crisis, focusing on the housing bubble and the incentive structures that encouraged banks to invest heavily in mortgage-backed securities. The paper argues that short-term bonuses, based on sales volume rather than long-term profitability, incentivized bankers to prioritize short-term gains over long-term stability, ultimately contributing to the crisis.
- The Asian Currency and Financial Crisis: This chapter analyzes the role of flawed incentives in the Asian financial crisis. It explores how government incentives, such as tax breaks for foreign currency lending, encouraged banks to attract large inflows of foreign capital. The paper also examines how incomplete agency regulations allowed controlling shareholders to expropriate minority shareholders, further exacerbating the crisis.
Schlüsselwörter (Keywords)
The paper focuses on key themes such as flawed incentives, financial crises, risk management, agency theory, and the role of both government and corporate incentives in contributing to systemic instability. The paper also examines the impact of short-term bonuses on risk-taking behavior, the influence of government policies on foreign investment, and the consequences of incomplete agency regulations.
Frequently Asked Questions
How do flawed incentives cause banking crises?
Flawed incentives, such as short-term bonuses based on sales volume rather than long-term stability, encourage bankers to take excessive risks that can lead to systemic failure.
What are the similarities between the 2008 financial crisis and the 1997 Asian crisis?
Both crises were driven by systemic instability caused by incentive structures that prioritized short-term gains and government policies that encouraged risky lending practices.
What role did government incentives play in the Asian crisis?
In Asia, government incentives like tax breaks for foreign currency lending encouraged banks to attract volatile foreign capital, which exacerbated the eventual collapse.
How does agency theory apply to these financial crises?
Incomplete agency regulations allow controlling shareholders or managers to act in their own interest at the expense of minority shareholders or long-term institutional health.
Why is risk management crucial in incentive structures?
Without integrating risk management into compensation, individuals are incentivized to ignore long-term threats in favor of immediate financial rewards.
- Quote paper
- Mario Pesch (Author), 2010, Financial Crisis: Flawed Incentives Cause Banking Crises, Munich, GRIN Verlag, https://www.grin.com/document/164361
