Securities Class Actions in the US Banking Sector: Between Investor Protection and Bank Stability

Abstract

The ongoing financial crisis has made it clear that bureaucratic supervisors and public enforcement authorities are encountering serious difficulties in ensuring both bank stability and credit risk control. According to part of the literature, securities class actions (SCA) can be considered as a complementary tool to public supervision in regulating and supervising markets and corporations. This paper aims at investigating whether SCA can also play a role in banking supervision acting as an effective incentive device for banks’ management to carefully evaluate risks and/or can represent a warning signal of risk of insolvency, which could be taken into account by public supervisors. Two groups of US banks are compared in the period 2000-2008. The first – treated – group includes banks that have faced a SCA in the past, while the second – control – group includes banks never involved in such a procedure. Results seem to suggest that collective private litigation procedures can be used to improve ex post regulation in the banking sector.

Keywords: securities class action, bank safety, corporate governance, market governance

JEL Classification: G3, K4