Comment on how these may have contributed to the crisis and describe Essay

Comment on how these may have contributed to the crisis and describe the action subsequently taken on these two matters by the UK Government, see other instructions - Essay Example rigger for the crisis was the bursting of the housing bubble in the US, several corporate governance issues at banks were equally responsible for the spread and deepening of this crisis. Two of the most important corporate governance issues at play were – the merger of retail and institutional banking under one banking entity and the fat bonus culture at financial services companies. Whereas retail banking refers to banking in which banks interact/transact with individuals, institutional banking refers to transactions with corporate. The retail banking is rather risk averse and mostly a stable business in itself whereas institutional banking generally involves a lot more risk taking and the business is quite volatile. By having retail and institutional banking under one parent company, the risks taken for doing business in one area become a possible liability for the other. Therefore, losses incurred at institutional banking would have to be borne by the retail banking branch as they fall under the same group. Secondly, some institutions can indulge in putting more risk in its institutional banking business in order to increase their retail business, which is what explains how many banks were able to sell sub-prime mortgages before the crisis started. Sub-prime mortgages are high risk investments for banks and by packaging them into mortgage-backed bonds and sel ling/buying them through their institutional banking arms, banking groups take on significant risk on their balance sheets. Now, in the event of losses in the institutional banking business, financial services groups had to delve into their equities and reserves to cover these losses and to pay their dues. Thus, from retail banking clients’ point of view, the financial groups were using up their savings put in the bank to pay for losses incurred on the institutional banking business. This led to loss of confidence in the retail banks and caused bank-runs at some banks. As the retail banks keep only a