In Lehman Brothers, the Chief Risk Officer (CRO) was stripped of her role in risk matters after warning against too much risk in the face of growing pressure to compete against other investment banks. Similarly, repeated warnings raised by the business chief underwriter of Citigroup against large purchases of defective loans did not translate into action; instead, he was downgraded in performance reviews and subsequently demoted. Another major component in the governance of finance is how individual incentives are influenced through compensation. The global financial crisis offers a telling display of how  7  Parliamentary Commission on Banking Standards (2013). Changing Banking for Good: First report of session 2013–14. Vol. II, HL Paper 27-II HC 175-II (London: HMSO), paragraph 553. 8  Guerrera, F. and P. T. Larsen. Gone by the board? Why bank directors did not spot credit risks. Financial Times 25 June 2008. 9  Source: https://www.fca.org.uk/static/documents/consultation-papers/cp14–13.pdf, paragraph 7.6. 10  Financial Crisis Inquiry Commission (2011). The Financial Crisis Inquiry Report: Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States. Washington, D. C.  BIS central bankers’ speeches  7  incentives were misaligned through the widespread adoption of compensation systems that rewarded short-term performance. In the US, loan officers at Washington Mutual were rewarded more for originating higher risk loans, while loan processing personnel were compensated according to the speed and number of loans processed, rather than loan quality.

In pondering the issue of financial governance at the individual and household level, I am reminded of Leo Tolstoy’s infamous quote from Anna Karenina, “All happy families are alike; each unhappy family is unhappy in its own way.” There are indeed numerous causes of unhappiness, but being confronted with the consequences of bad financial decisions made in the past must surely be a common cause of much unhappiness among many families. This issue is especially pertinent in the current environment of prolonged low interest rates. Sound financial decisions are needed to ensure that households do not live beyond their means and accumulate excessive debt. This is essential to ensure the sustainable growth in consumption, rather than having debt-fuelled consumption binges followed by prolonged slumps. It is these types of considerations that have made Bank Negara Malaysia maintain a level of interest rates that we believe balances between supporting the economy and discouraging excessive risk taking. This has been supplemented with other policy tools, including macroprudential policies, to manage risks within the financial system and economy. Therefore, it is not only national governments themselves that must practice sound financial governance, they must also promote it as a key priority within the society and not create incentives that lead to unsustainable financial behaviour among economic agents. Turning now to the corporate sector, at the surface, corporate financial governance appears to have ample checks and balances. Management is accountable to boards and boards are accountable to shareholders.