Which of the following is an example of how incentive structures contributed to the collapse of investment banks?
A) The bonus structure of most executives was tied to long-term profitability.
B) The ratings agencies were paid attractive fees by investment banks seeking high ratings for their securities.
C) Mortgage-backed securities were closely scrutinized in order to minimize risk and obtain higher ratings.
D) Despite SEC regulations, investment banks kept leverage ratios low in order to increase profits.

Question

Quizplus · Accepted Answer

Investment banks had incentive structures that contributed to the collapse, including the ratings agencies who were paid attractive fees by investment banks seeking high ratings for their securities. This conflict of interest meant that ratings agencies were not providing accurate ratings, which contributed to the collapse of investment banks.

Which of the Following Is an Example of How Incentive