After reading a book about applying the theories of Adam Smith it seemed many points raised in the 1st Chapter are worth debate. Is and should the other side of any financial institutions Risk Log be Morality in a similar way to the Capital and Trading Investments of the organization. Another name for Morality in a corporate sense is Governance. So this should in theory keep the Risk Log in check. Like the US leading investment bank, Goldman Sachs announced that no investment would be greater than 1% of its Capital.
So this brings out the answer most failed banks did not operate the Risk and Governance (Morality) model as indicated above. And, why have the organizations behind the Basel accord not spotted this. Or if they did, are Central Banks or Federal Banks failed to regulate banks under their regulation.
Another Adam Smith book (1) covers Morality in society and its this lack of reflection that organizations fail on. Corporate Responsibility aims to address this and it has a growing movement, supported by the laws and directives in different countries. Both National and Local Government need to apply the Risk and Governance model on their investments with payback over 25 or 50 years. Also their Capital model needs taxes and other income streams to balance against their investments. They would struggle to match Goldman Sachs aim with 1% of capital per investment and therefore need to be G20 goals agreed and set for each country. Even looking at it in this way is good at communicating the points raised above.
Mortgage Banks (Fannie Mae and Mack in the US and Northern Rock and Bradford & Bingley in the UK) failed through not applying the Risk and Governance (Morality) model vs income and investments. Eastern Europe and all other developing countries around the globe need to learn from these mistakes and from the greatest book (2) written by Adam Smith and being promoted by the Adam Smith Institute.
1 The Theory of Moral Sentiments, 1976 by E G West
2 The Wealth of Nations, 1975 published by J M Dent & Sons
Eric Sutherland T/A Trog Associates Ltd
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