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Can Bank Directors Really Govern Risk?
It was considered one of the top banks in the country. It had grown rapidly, nearly tripling its asset base over a nine-year period, but had also used short-term deposits to fund a large portfolio of longer-term U.S. government securities. When the Federal Reserve began to aggressively raise the federal funds rate to bring inflation under control, the market value of those supposedly safe bonds plummeted well below their face value. As the full extent of the problem became widely known, the bank’s depositors withdrew their funds, resulting in a liquidity crisis that forced the federal banking regulators to act.…
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