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Rethinking Global Economic Governance in Light of the CrisisThis view of ‘excessive risk-taking’ has the advantage of preserving the option for banksto invest in high-risk ventures provided they result in a corresponding high return anddo not jeopardise the continuity of the bank as a going concern. It does not emphasisefinancial institutions’ possibly overoptimistic expectations but rather the risk-adjustedcost of funds, as well as the lack of transparency that characterises investment in banks:lending to a financial institution on the basis of a reputation of safe investments inthe banking industry supported by a tradition of bailouts by the Treasury where evenuninsured debt holders have been protected from the bankruptcy losses.With this definition in mind, four possible ‘culprits’ stand out:• Managers’ incentives and corporate governance;• Understatement of the business cycle risks (capital is excessively cheap and lendingexcessively permissive in upturns with the opposite holding in downturns);• Failure of regulatory supervision and market discipline to curb excesses in boomtimes;• Moral hazard, whereby banks take too much risk in anticipation of being bailed outin the event of massive losses.Findings and analysisFirst of all, excessive risk-taking is directly related to corporate governance. 2 Thedecisions a bank takes regarding risk levels are ultimately the responsibility of managersand boards of directors. Whether in their strategic decisions managers consider theirown bonuses, short-term stock price movements, shareholders’ short-run interests(rather than stakeholders’ long-run ones) or simply the financial institution’s culture ofrisk, these are all decisions that are substantiated by the board and therefore result fromthe structure of financial institutions’ corporate governance.2 For details, see Mehran et al (2012).68