How much of it was due to bad management and incentive structures that encouraged too much risk taking?
There is definitely a problem with existing incentives structures and compensation schemes based on volumes (regardless of risks). The bonus culture encouraged some bankers to take on excessive risks. Ever more complex financial products gave bankers the ability to diversify away some of the risk (or the impression of being able to) and this made it more difficult for regulators to assess a bank’s overall exposure. Financial markets also failed to signal a global underpricing of risks and excessive risk taking, as indicated by low volatility and tight spreads up to the summer of 2007. Should business leaders in the banking sector have shunned being involved in financial products they did not fully understand? As long as the economy was growing, everyone was winning. People with relatively low incomes could afford mortgages, investors would get good returns on their investments and banks earned high profits for their shareholders. Governments were also earning high tax revenues from the
