Corporate Governance of Anglo Irish Bank (Research Paper Sample)

CORPORATE GOVERNANCE OF ANGLO IRISH BANK
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Corporate Governance of Anglo Irish Bank
Introduction
An unusually large number of financial companies went under or were bailed out by state governments during the international economic crisis of 2007-2008. The collapse of these companies led to a freeze on international credit markets and called for government interventions globally. Ideally, while the macroeconomic factors such as loose monetary policies, blamed by some for laying the foundations for the financial crisis, had an effect on all institutions, the result impacted more on some companies than others. Current researches claims that companies’ risk management as well as their economic policies had a major effect on the extent to which businesses were affected by the financial crisis. Since organizational risk management as well as financing policies are the outcomes of cost-benefit trade-offs made by corporate boards and shareholders, an important connotation of these studies is that corporate governance had a huge impact on organizational performance during the crisis time. This research paper provides experimental evidence on whether, and how corporate governance impacted the performance of Anglo Irish Bank during the 2007-2008 financial crisis. The research will examine specifically the role played by independent directors and influential shareholders. The paper will include three corporate governance factors of Anglo Irish Bank namely, board independence, institutional ownership and the existence of large shareholders, considered as of January 2007.
Analysis shows that Anglo Irish Bank, just like other firms that registered even worse stock returns during that time, had more independent board and wider institutional ownership. A possible explanation for this finding is that independent directors, as well as institutional shareholders, encouraged managers to increase shareholder returns by way of bigger risk-taking before the crisis. Shareholders may find it suitable to raise the risk since they do not internalize the social costs of fiscal organization collapses as well as institutional arrangements such as deposit insurance that may deteriorate debt holders` restraint. On top of this, due to their firm-specific human capital as well as individual benefits of control, managers are inclined to seek a lesser level of risk compared to shareholders. In line with this view, DeYoung et al established that in the years preceding the financial crisis (2000-2006), most banks including the Anglo Irish Bank changed CEO reimbursement packages to motivate executives to utilize new growth opportunities brought about by deregulation and the emergence of debt securitization.
Study Background
The macroeconomic conditions in the period preceding the banking crisis came from a mutually-reinforcing relation of international growth and nationwide policies. From the end of the 20th century onwards, the world economy was marked by comparatively high growth, and low levels of inflation, as well as low interest rates. This era is referred by analysts to as The Great Moderation, which can be denoted by the affirmative effects of globalization, industrial progress and manufacturing increases, and the robust credibility of various central banks around the globe. The central banks had become independent from political influence thus enabling the stabilization of inflation expectations.
During this time, many countries adopted a more open economic system. The significance of international trade in their economies rose, which limited the scope for price increases at home. The assimilation of China, India and other up-and-coming markets into the global economy increased competition and retained labor costs and, therefore, goods priced at a minimum. On top of this, a transitory rush in productivity in the U.S. and the European Union in the second half of the 1990s depressed the increase in unit labor cost in the world’s major economies .
This gentle inflation conditions brought about monetary policy mistakes, mostly by central banks that followed partially or totally a policy of inflation targeting, disregarding improvements in money supply and credit growth, as well as asset prices. All the main central banks had maintained interest rates too low for far too long as noted by the IMF before the financial crisis set in. A clear example is the U.S. Federal Reserve, which deferred security regulation continually from the end of the 1990s forward. Up until 2001, policy was always simplified, or maintained in its original form for well-explained reasons. The Asian crisis, as well as the Russian default in 1998 and the dot-com bubble burst in 2000-2001, were seen as valid reasons to reschedule interest rate increases which otherwise might have taken place. After the September 11 attacks, the Fed brought down its main interest rate to 1%, again for valid reasons. However, interest rates were maintained at a low level even after growth picked up the pace again. Actual interest rates were negative for an extended time, not only in Ireland but also in the United States.
Global liquidity creation was amplified by the exchange rate strategies of the key economies. China, the countries of the Middle East, and at first Japan, attached their currencies officially or unofficially to the US dollar and intervened in a large scale program to evade appreciation. This led to the skyrocketing of the foreign exchange reserves of these countries. This triggered international liquidity again. In addition to this, by basing their currencies to the US dollar, blossoming economies as China and the countries of the Middle East introduced an economic policy position that was too loose from their economic standpoint. As many countries around the world attached their currencies to the U.S. dollar, international imbalances, that is, present account excesses in Asia and the Gulf, and current account shortfalls in the United States rose. The surplus countries devoted to meet their rising foreign exchange reserves in shortfall nations, adding to the descending pressure on interest rates and risk spreads. A long period of high liquidity, as well as low minimal and factual interest rates as expected brought about low risk aversion among shareholders. Although well pronounced inflation did not manifest itself for a long time, for the reasons elucidated above, this business climate led to high increases in asset prices in different parts of the globe and a progression of bubbles in equity, bond, housing, commodity as well as credit markets. In the opinion of several economists, this was a primary factor behind the international economic crisis that set in from the middle of 2007, together with the rise of new, intricate financial products and the widespread malfunction of financial market supervision. This was the macroeconomic setting in which Anglo Irish Bank found itself in the years before 2007.
Study Analysis: Anglo Irish Bank Management and Governance
The economic environment in Europe and the international economy during the last ten years (1997-2007), combined with fast economic integration, was a climate that truly put bank management and bank governance to the test. In many economies, there were well placed incentives to strive for market dominance during elongated credit and asset price explosions, while across-the-border funding offered even more liquidity to attain this objective. The thing that encouraged the Anglo Irish Bank managers and shareholders to make unwise decisions was that the majority of the transformations, happening in financial markets, and the factual economy appeared to be permanent. This presented bankers not in Anglo Irish Bank but in all major banks with a superficial “new paradigm” that combined low inflation, cheaper international supply of goods, and a fall in the risk payment demanded by lenders resulted in risks that were more widely and proficiently spread. In Ireland, there was an increase in income, which seemed to authorize higher lending among corporate and retail clients. Some of these alterations in the banking climate, without a doubt, proved to be more long lasting compared to others. The banking business in Anglo Irish Bank was far from exceptional in these respects.
Faced with these transformations, the management of Anglo Irish Bank responded in varied ways, all of which incorporated increasing their balance sheet activities, typically financed at the margin by a rise in wholesale business loaning. The bank favored investing in domestic business areas that were not yet highly viable. The bank management concentrated on lending heavily on commercial and residential property. The bank also sought cross-border opportunities in foreign countries, usually in the form of plain vanilla property lending. The Anglo Irish Bank board also bought large amounts of compound securities following the example of US mortgages.
Ideally, it was not surprising that property lending was the priority strategy of Anglo Irish Bank. A supposed “permanent” downward change in real estate interest rates, as well as an upward shift in property prices, accompanied mostly by robust development in household earnings, made mortgages an instrument of choice for the bank`s balance sheet expansion. Credit and property prices then in most cases then followed each other in an upward trend, in one of those rotations that characterize many periods of economic history, and not realized for what they are. This trend ultimately left the management of the bank in a genuine dilemma. The bank had the option of contending strongly by way of increasingly aggressively priced and structured products, or it could find itself dwindling in terms of market share, whic...