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The Mortgage Financial Crises: The Role of Credit Risk Management and Corporate Governance

Author

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  • Lang, William W.

    (Federal Reserve Bank of Philadelphia)

  • Jagtiani, Julapa

    (Federal Reserve Bank of Philadelphia)

Abstract

This paper discusses the role of risk management and corporate governance as causal factors in the onset of the financial crisis. The downturn in the housing and mortgage markets precipitated the first phase of the financial crisis in August 2007 when the solvency of a number of large financial firms was threatened by huge losses in complex structured financial securities. Why did these firms have such high concentrations in mortgage-related securities? Given the information available to firms at the time, these high concentrations in mortgage-related securities violated basic principles of modern risk management. We argue that this failure was a result of principal-agent problems internal to the firms and to breakdowns of corporate governance systems designed to overcome these principal-agent problems.

Suggested Citation

  • Lang, William W. & Jagtiani, Julapa, 2010. "The Mortgage Financial Crises: The Role of Credit Risk Management and Corporate Governance," Working Papers 10-12, University of Pennsylvania, Wharton School, Weiss Center.
    • Handle: RePEc:ecl:upafin:10-12
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    File URL: http://fic.wharton.upenn.edu/fic/papers/10/10-12.pdf
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    References listed on IDEAS

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    Cited by:

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    4. Muhammad Zeeshan Younas, 2020. "How Did Risk Management Methods Change After The 2007 Sub-Prime Mortgage Crisis In The United Kingdom?," Bulletin of Business and Economics (BBE), Research Foundation for Humanity (RFH), vol. 9(1), pages 22-31, March.
    5. Juan Antonio Azkunaga & Leire San-Jose & Sara Urionabarrenetxea, 2013. "The impact of financial globalization and financialization on the economy in the current crisis through banking corporate governance," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 7(3), September.
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    7. Bülbül, Dilek & Lambert, Claudia, 2012. "Credit portfolio modelling and its effect on capital requirements," Discussion Papers 11/2012, Deutsche Bundesbank.
    8. Gérard Mondello & Nissaf Ben Ayed, 2020. "Agency Theory and Bank Governance: A Study of the Effectiveness of CEO's Remuneration for Risk Taking," GREDEG Working Papers 2020-03, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), Université Côte d'Azur, France.
    9. Chenguang Hu & Kyung Hwan Yun & Ziqi Su & Chang Xi, 2022. "Effective Crisis Management during Adversity: Organizing Resilience Capabilities of Firms and Sustainable Performance during COVID-19," Sustainability, MDPI, vol. 14(20), pages 1-20, October.
    10. Cynthia Clark & Harry Van Buren, 2013. "Compound Conflicts of Interest in the US Proxy System," Journal of Business Ethics, Springer, vol. 116(2), pages 355-371, August.
    11. Walter Gontarek & Yacine Belghitar, 2018. "Risk governance: Examining its impact upon bank performance and risk‐taking," Financial Markets, Institutions & Instruments, John Wiley & Sons, vol. 27(5), pages 187-224, December.
    12. Paul Tanyi & Jack Cathey, 2024. "The audit of banks in the USA: Has it changed since the financial crisis?," Journal of Banking Regulation, Palgrave Macmillan, vol. 25(4), pages 378-403, December.
    13. Franklin Allen & Itay Goldstein & Julapa Jagtiani & William W. Lang, 2016. "Enhancing Prudential Standards in Financial Regulations," Journal of Financial Services Research, Springer;Western Finance Association, vol. 49(2), pages 133-149, June.
    14. Blessward JENYA* & Maxwell SANDADA*, 2017. "Enhancing Success of SMES Through Risk Enterprise Management: Evidence From A Developing Country," Pakistan Journal of Applied Economics, Applied Economics Research Centre, vol. 27(2), pages 173-188.
    15. Donnelly, Grant & Iyer, Ravi & Howell, Ryan T., 2012. "The Big Five personality traits, material values, and financial well-being of self-described money managers," Journal of Economic Psychology, Elsevier, vol. 33(6), pages 1129-1142.
    16. Ferguson, Jodie L., 2014. "Excessive risk exposure: A question of ethical decision-making," Journal of Business Research, Elsevier, vol. 67(1), pages 2684-2685.
    17. Lawrence R. Cordell & Yilin Huang & Meredith Williams, 2011. "Collateral damage: Sizing and assessing the subprime CDO crisis," Working Papers 11-30, Federal Reserve Bank of Philadelphia.
    18. Lam, Alexis Lam Man Yee, 2019. "An analysis of the effect between firm's performance and determinant of liquidity ratio of Revlon Incorporation in cosmetic industry," MPRA Paper 97281, University Library of Munich, Germany, revised 28 Nov 2019.
    19. Alessandro Gennaro & Michelle Nietlispach, 2021. "Corporate Governance and Risk Management: Lessons (Not) Learnt from the Financial Crisis," JRFM, MDPI, vol. 14(9), pages 1-19, September.
    20. Chih Khiam Ping & Tan Seng Teck, 2020. "Corporate Governance: Voluntary, Mandatory or a Hybrid Approach?," International Business Research, Canadian Center of Science and Education, vol. 13(1), pages 233-236, January.
    21. Ali Akbar Arghand & Mahmood Alborzi & Ali Rajabzadeh Ghatari, 2021. "Banking System Modeling by Viable System Modeling (VSM)," Systemic Practice and Action Research, Springer, vol. 34(3), pages 269-290, June.

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    More about this item

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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