When liquidity tightens, though, too many lenders rely on asset sales, causing asset prices and loan recovery to plummet. Because lenders do not account for the effects of their lending on the “fire sale” price, and subsequently on lending by others, they may have an excessive incentive to build leverage.
I am sure that each one of you present here today will agree that a sound corporate governance framework is the linchpin for the effective functioning of any organization. This is even more critical in the financial services industry dealing with massive funds. History is littered with examples of failures of institutions, including venerable ones, due to poor corporate governance practices.