Alvin Hilaire: The imperative of strong corporate governance for financial stability

Address by Dr Alvin Hilaire, Governor of the Central Bank of Trinidad and Tobago, at the Launch of the Financial Stability Report, Port of Spain, 13 June 2017.

The views expressed in this speech are those of the speaker and not the view of the BIS.

The global financial crisis of 2007/09 brought into sharp relief the dangers that weak governance in financial institutions can pose for economic stability.

It is well known that a major catalyst for the crisis in late 2007 was the subprime mortgage market debacle that rapidly spilled over into more general liquidity and eventual solvency problems in the United States. The contagion effects were virtually instantaneous and quite dramatic-moving from mortgage lenders in the US to other financial firms and then quickly spreading across the globe to usher in a full blown global economic downturn. As intriguing and intertwined as they were, the purely economic and financial components behind the nuclear bomb-type mushrooming of the situation-overleveraging, closely interlinked capital markets etc.-were just part of the problem. It quickly became apparent to most observers that weaknesses in governance of financial institutions played a significant part in actively encouraging or at minimum facilitating behaviors that turned out to be destabilizing. Some analysts held the view that the governance framework-including the laws, codes of conduct, regulation and supervision-was deficient and needed to be substantially beefed up; another school of thought posited that the apparatus itself was basically sound but implementation of established principles was deficient. However one cuts it, the consequences of the financial crisis were vast in terms of lost output, unemployment, financial instability, and bailout costs to taxpayers across the world, and meaningful efforts were subsequently devoted to explicitly strengthening financial sector governance.