of Australia, and the Australian Prudential Regulatory Authority for valuable comments. Yian Liu provided

This document draws heavily from previous work with Raghuram Rajan and Jeremy Stein, but they should not be held accountable for anything that I have added to our original work. I thank Andrew Ellul and Vjay Yerrramilli for sharing their data and for comments and suggestions. I thank the Center for Research on Security Estimates prior to the demise of Lehman Brothers suggested that U.S. banks and investment banks stood lose up to $250 billion from their exposure to residential mortgages securities. 1 With the sharp downturn that began in the fall of 2008, the losses ultimately look to be much higher. But even before the global economic collapse in late 2008, the resulting depletion of

eviDenCe from CDS

This report analyses the impact of failures and weaknesses in corporate governance on the financial crisis, including risk management systems and executive salaries. It concludes that the financial crisis can be to an important extent attributed to failures and weaknesses in corporate governance arrangements which did not serve their purpose to safeguard against excessive risk taking in a number of financial services companies. Accounting standards and regulatory requirements have also proved insufficient in some areas. Last but not least, remuneration systems have in a number of cases not been closely related to the strategy and risk appetite of the company and its longer term interests. The article also suggests that the importance of qualified board oversight and robust risk management is not limited to financial institutions. The remuneration of boards and senior management also remains a highly controversial issue in many OECD countries. The current turmoil suggests a need for the OECD to re-examine the adequacy of its corporate governance principles in these key areas.

Since its inception, a most distinctive (and controversial) feature of the ECB monetary policy strategy has been its emphasis on money and monetary analysis, which constitute the basis of the so-called monetary pillar. The present paper examines the performance of the monetary pillar around the recent financial crisis episode, and discusses its prospects in light of the renewed emphasis on financial stability and the need for enhanced macro-prudential policies. JEL Classification: E52, E58

philip arestis and elias karakitsos

The sterling unsecured loan market during 2006–08: insights from network theory

The outbreak of the financial crisis coincided with a sharp increase of worldwide interbank interest rates. We analyze the micro- and macroeconomic determinants of this phenomenon, finding that before August 2007 interbank rates were insensitive to borrower characteristics, whereas afterwards they became reactive to borrowers ’ creditworthiness. At the same time, conditions for large borrowers became relatively more favorable, both before and after the failure of Lehman Brothers. This suggests that banks have become more discerning in their lending, a welcome change, but that moral hazard considerations related to the ”too big to fail ” argument should remain a main concern for central banks.

In 2010 all ECB publications feature a motif taken from the €500 banknote. NOTE: This Working Paper should not be reported as representing the views of the European Central Bank (ECB). The views expressed are those of the authors and do not necessarily reflect those of the ECB. This paper can be downloaded without charge from

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