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Corporate Governance of Financial Institutions

45 Pages Posted: 31 Jan 2012 Last revised: 21 Sep 2012

Hamid Mehran

Independent

Lindsay Mollineaux

Federal Reserve Bank of New York

Multiple version iconThere are 2 versions of this paper

Date Written: January 1, 2012

Abstract

We identify the tension created by the dual demands of financial institutions to be value-maximizing entities that also serve the public interest. We highlight the importance of information in addressing the public’s desire for banks to be safe yet innovative. Regulators can choose several approaches to increase market discipline and information production. First, they can mandate information production outside of markets through increased regulatory disclosure. Second, they can directly motivate potential producers of information by changing their incentives. Traditional approaches to bank governance may interfere with the information content of prices. Thus, the lack of transparency in the banking industry may be a symptom rather than the primary cause of bad governance. We provide the examples of compensation and resolution. Reforms that promote the quality of security prices through information production can improve the governance of financial institutions. Future research is needed to examine the interactions between disclosure, information, and governance.

Keywords: financial institutions, governance, disclosure, information, market discipline, financial crisis

JEL Classification: G01, G21, G32, G39

Suggested Citation

Mehran, Hamid and Mollineaux, Lindsay, Corporate Governance of Financial Institutions (January 1, 2012). FRB of New York Staff Report No. 539. Available at SSRN: https://ssrn.com/abstract=1995666 or http://dx.doi.org/10.2139/ssrn.1995666

Hamid Mehran (Contact Author)

Independent ( email )

No Address Available

Lindsay Mollineaux

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

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