Abstract
Increasingly, in the last decade, largely due to perceived greater shareholder pressures for more profitable performance, compensation maximization has taken center stage in some segments of the banking industry. Banks need to establish board governance committees with explicit responsibilities to monitor corporate ethics and culture. This paper aims to measure the correlation between dire economic conditions, competition, banking profitability, and misconduct. This is done by means of GDP comparisons to determine economic conditions, calculating z-scores to determine bank risk taking, and analysis of variance of return on assets, return on equity and z-scores, to determine profitability, and fines comparisons to determine misconduct. Analysis finds that dire economic conditions may lead to increased competition, increased competition may lead to increased risk taking, increased risk taking may have an impact on a bank’s financial performance, and decreased financial performance may lead to increase in misconduct. Keywords: banking competition, banking behavior, economic conditions. JEL Classification: C21, G01, G21, G32
Highlights
Between 2007 and 2009, world financial markets were in the midst of a credit crisis of historic breadth and depth, which began as a result of consumer defaults on subprime mortgages widely viewed as the worst financial crisis since the Great Depression of 1929 (Ivashina & Scharfstein, 2010).This credit crisis raised concerns about the solvency and liquidity of financial institutions worldwide with the failures of Lehman Brothers and Washington Mutual, in addition to government takeovers of Fannie Mae, Freddie Mac and AIG, in the largest bank failure in United States (US) history
The reason for the two different timelines is to determine if the credit crisis did, cause increased risk taking by the banks
The literature review confirmed that dire economic conditions resulted in increased competition, as there were reports of “champagne bonuses” and “a grand in your hand” for reac-hing targets
Summary
Between 2007 and 2009, world financial markets were in the midst of a credit crisis of historic breadth and depth, which began as a result of consumer defaults on subprime mortgages widely viewed as the worst financial crisis since the Great Depression of 1929 (Ivashina & Scharfstein, 2010). This credit crisis raised concerns about the solvency and liquidity of financial institutions worldwide with the failures of Lehman Brothers and Washington Mutual, in addition to government takeovers of Fannie Mae, Freddie Mac and AIG, in the largest bank failure in United States (US) history. Evidence surfaced as early as 2005 that Barclays, a United
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