Since I will essentially concentrate on the first possibility, i.e. incentives, let me recall, by a way of contrast, a recent study by Fahlenbrach and Stulz (2011). These authors show that the losses of the banks whose managers’ incentives were most closely aligned with the long-term interests of the firm they managed were at least as large, in the last crisis, as those at the financial institutions where governance was more obviously lacking. This suggests that wrong incentives were not the only factor in the behaviour and decisions that led to the crisis. Knowledge and competence were also at play. ... or a misalignment of incentives? Incentives are an important component in risk and risk-taking. If there is an important lesson in economics and finance that has not been invalidated by the financial crisis, it is that incentives really do matter. The excessive risk-taking that was observed prior to the financial crisis is likely to have been – among other things – the result of the fact that key decisionmakers were not provided with the right incentives to carefully analyse and balance the possible consequences of the risks they agreed to take. Let us take a bank as an example. The main relevant stakeholders are the depositors, the shareholders, the managers and the bondholders.
Jarle Bergo: Will strong growth in the banking industry continue? Views on the balance of risks Speech by Mr Jarle Bergo, Deputy Governor of Norges Bank (Central Bank of Norway), at a banking industry seminar on primary capital certificates, Oslo, 13 September 2007. The text below may differ slightly from the actual presentation. The address is based on the assessments presented at Norges Bank’s press conference following the Executive Board’s monetary policy meeting on 15 August, Financial Stability Report 1/07 and on previous speeches. *  *  *  Thank you for inviting me to this seminar on primary capital certificates to give an introductory speech on developments in the banking industry and the balance of risks. As we all know, there is a strong global focus on financial institutions and financial markets at present, with frequent use of words such as "turbulence", "problem" and "crisis". I will spend some time on the background to these developments and try to assess the possibility of similar problems in Norway. I will also point to other risk elements that the industry should bear in mind. First, however, I will give a brief review of the economic situation in Norway and how this has affected the banking industry. The Norwegian economy and the financial sector The Norwegian economy is now in a cyclical upturn. Over the past three years, mainland GDP has grown by approximately 4½ per cent annually, and this high rate of growth has continued in 2007.