He had assumed, he said, that shareholders in financial firms had adequate incentives to ensure that the firms they owned did not take excessive risks. As shareholders have subsequently found out, risk taking that goes wrong can be very costly to them. However, Greenspan acknowledged, his assumption turned out to be flawed. Shareholders did not act to prevent excessive risk-taking. The conclusion is clear.
If firms lack the incentives for adequate self-regulation then the regulator must step in. This is the aim of our Rulebook requirements on corporate governance and internal controls. The financial crisis also points to the need for high standards of risk management in financial firms.