In the US alone, conservative estimates have placed the loss from the financial crisis at between $ trillion to $ trillion, or 40 to 90 per cent of the annual economic output 6. In response to the global crisis, more extensive international reforms have been pursued to strengthen the financial buffers of financial institutions through, among others, stricter capital and liquidity requirements. These reforms have helped to strengthen the balance sheets of financial institutions and sustained their ability to support orderly financial intermediation. While I acknowledge the importance of these reforms, there is an even more important issue related to the overall “governance of finance”. The financial crisis contains many lessons on how governance of finance failed as well as the consequences of such failure. The governance of finance relates to the behaviour of financial institutions and their determinants from the perspective of organisational arrangements, incentive structures and ethics, as well as the regulatory and market environment. When these factors are correctly aligned, the financial system plays its role in supporting sustainable economic growth; when they are not, the financial system creates risks that can potentially undermine economic growth. Central to the robust governance framework of financial institutions are strong institutional arrangements that provide effective checks and balances to facilitate sound decision-making. At the broadest level, this entails well-defined responsibilities and accountabilities,  6  6  Luttrell, Atkinson and Rosenblum (2013). Assessing the Costs and Consequences of the 2007–09 Financial Crisis and Its Aftermath. Economic Letter 8(7), Federal Reserve Bank of Dallas.

Meanwhile, AIG Financial Products compensated its employees, including risk officers, on the basis of revenues brought in rather than profits. At Lloyds, incentive schemes which pressured sales staff to meet targets or face demotion also encouraged misselling of payment protection insurance. In all these instances, executives were inclined to focus on immediate outcomes such as revenues and sales targets in order to deliver visible results quickly, without much regard for the risks assumed. Major efforts have since been undertaken internationally to address these issues. The essence of these reforms is twopronged: the first is a greater emphasis on the governance of the compensation framework by the board and senior management; the second is a greater alignment of compensation practices with prudent risk-taking. As risks undertaken today may materialise much later in the future, the latter entails deferring portions of compensation and subjecting them to adjustments, such as bonus-malus and clawbacks. Finally, a strengthened role of market discipline can also shape the governance of finance for the better by reducing information asymmetries between the market and financial institutions. Again, regulations can play a part by enhancing the scope and quality of mandatory disclosures, such as in respect of key information relating to risk exposures, risk management policies and capital ratios. A relevant emerging trend among investors and consumers has been an increasing focus on more sustainable approaches to finance, including those which consider environmental, social and governance concerns.