Agency Theory in Banking -‘Lessons from the 2007-2010 Financial Crisis’

This paper presents an agency theory explanation for certain operational risks and the subsequent impact as a result of the financial crisis starting in 2007, which has been the worst financial crisis in two generations, erasing $14.5 trillion, or 33 percent, of the value of the world's companies. During the period from 2007 to 2010 banks suffered severe credit and liquidity stress to the point where the US Government implemented bailout programs such as Troubled Asset Relief Program [TARP], and addressed monetary policy in the hope of stabilizing the banking industry. In light of these programs and changes, the aim of this study is to provide additional theory to help understand the financial and reputational impact on the banking industry due to credit risk and the subsequent impact on liquidity