BANK CEOS CONTRIBUTION TO CREDIT CRISIS
The 2008 credit crisis resulted from some of the factors that include market instability, weak underwriting practices and deregulation, incorrect pricing of risk, as well as easy credit conditions. These factors directly led to the crisis. However, there are some indirect factors that contributed greatly, and some of them could be overlooked. One such factor is the incentives given to the bank CEOs. It may seem strange or appear to be no connection between the credit crises, but critical evaluation reveals that the connection.
An overview of the bank CEOs' incentives reveals that their nature could have led to the occurrence of other factors that directly led to the crisis. The incentives are such that when the bank performs better, the payment for the CEO is raised but when the bank makes losses, the shareholders and other stakeholders bear the burden, and nothing happens to the CEOs. These incentives could have been installed to raise the performance of the CEOs but in this case, it happened the contrary. The CEOs relaxed in their job and became less considerate in their actions knowing that their compensation is secure, whatever the results. As such, the CEOs could enter into high risk transactions. Other factors follow like incorrect pricing of risks.
The CEOs also used credit poorly. Still, it is their incentives that led them to do so because their stakes were secure. The easy credit conditions led to the drying up of the credit wells that consequently led to mergers and absorption. The CEOs were no longer careful with their performance and so, the activities they undertook were not intended for the benefit of the banks. One more thing is that the incentives inculcated greed among the CEOs. It is so because every one of them wanted the banks to perform excellently so that their incomes could go high. As such, the actions they undertook were in the interests of their compensation. They could enter into rogue contracts as long as the bank made a profit. They lightened transactional terms in a bid to attract new contracts. An example is giving easy credit conditions, a factor that led directly to the credit crisis.
In conclusion, the Bank CEOs incentives contributed heavily to the credit crisis because of the impacts they had on the CEOs as well as what they inspired the CEOs to do.
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