Of Hungry Wolves and Horizontal Conflicts: Rethinking the Justifications for Bank Holding Company Liability
University of Illinois Law Review, Vol. 1999, p. 949, 1999
66 Pages Posted: 7 Feb 2000 Last revised: 28 Dec 2011
Date Written: 1999
This Article examines the extent to which bank holding companies should bear the costs of bank failure. Current banking law provides a number of ways to impose liability on bank holding companies for bank failure. Those devices, however, have developed haphazardly and sometimes rest on inconsistent theoretical foundations. This Article critiques the regulatory justifications that have been offered for holding company liability and offers an alternative justification for imposing liability on holding companies based on the idea that directors of bank subsidiaries suffer from an especially difficult form of horizontal conflict -- the situation where the board of directors owe several different duties and choose to serve shareholder interests to the exclusion of all others, including their duty to the bank as an entity. The Article resolves the horizontal conflict through application of agency-like principles. The quasi-agency approach would treat subsidiary directors as quasi-agents of the parent company and impose responsibility directly on the holding company for any duties that bank managers owe to parties other than the bank holding company (including the duty to act in the best interest of the bank as an entity). Under the quasi-agency approach, the holding company should be liable only to the extent that the directors of its properly capitalized bank failed to discharge duties to non-parent constituents (including any duty to the bank itself as a separate legal entity). The extent of the liability so incurred should be limited to the harm caused by the failure to discharge the duty.
Keywords: bank holding companies, bank failure, holding company liability
JEL Classification: K23
Suggested Citation: Suggested Citation