Corporate Governance of Banks and Other Financial Institutions After the Financial Crisis: Regulation in the Light of Empiry and Theory

Journal of Corporate Law Studies, Volume 13, Part 2, pp. 219-253.

35 Pages Posted: 3 Oct 2013 Last revised: 14 Nov 2013

See all articles by Klaus J. Hopt

Klaus J. Hopt

Max Planck Institute for Comparative and International Private Law; European Corporate Governance Institute (ECGI)

Date Written: October 1, 2013

Abstract

Corporate governance of banks and other financial institutions differs considerably from general corporate governance. For financial institutions the scope of corporate governance goes beyond the shareholders (equity governance) to include debtholders, insurance policy holders and other creditors (debt governance). From the perspective of the supervision of financial institutions debt governance is the primary governance concern. Equity governance and debt governance face partly parallel and partly divergent interests of management, shareholders, debtholders and other creditors, and supervisors. Failures in the corporate governance of banks and other financial institutions contributed to the financial crisis. Corporate law reforms are less suited to achieve better governance of financial institutions, strengthening supervisory law requirements is more promising. Prominent proposals include clearer separation of the management and control function, possibly by a two-tier board as for Swiss and Belgian banks; establishment of a separate risk committee of the board or an independent chief risk officer; dealing with the problem of complex or opaque structure and organization; and group-wide corporate governance in single entities as well as in the group. Appropriate supervisory law requirements are needed for the internal procedures of banks and other financial institutions, specifically for risk management, internal control and compliance, and internal and external auditing. Supervisory fit and proper tests for the board, the management and major shareholders are useful. Qualification and experience of board members of banks and other financial institutions are more important than independence, though having a number of independent directors is useful. These and other requirements of the regulation and supervision of banks and other financial institutions concerning better governance are demanding and even severe, but are necessary for regulated industries such as financial institutions. However the temptation to let them spill over indiscriminately to the corporate governance of the firm must be strictly resisted. This article analyses the economic, legal and comparative research and covers the reforms by the European Commission, the European Banking Authority, CDR IV and Solvency II up to mid 2013.

The article is a pre-peer reviewed version of "Corporate Governance of Banks and Other Financial Institutions After the Financial Crisis" which has been published in the Journal of Corporate Law Studies, Volume 13, Part 2, pp. 219-253.

Keywords: Corporate governance of banks, board, financial crisis, bank reform, bank supervision, governance of financial groups, bank risk management, fit and proper test, major shareholders of banks, independent directors, experience of directors

JEL Classification: G3, G21, G28, K22

Suggested Citation

Hopt, Klaus J., Corporate Governance of Banks and Other Financial Institutions After the Financial Crisis: Regulation in the Light of Empiry and Theory (October 1, 2013). Journal of Corporate Law Studies, Volume 13, Part 2, pp. 219-253.. Available at SSRN: https://ssrn.com/abstract=2334874

Klaus J. Hopt (Contact Author)

Max Planck Institute for Comparative and International Private Law ( email )

Mittelweg 187
D-20148 Hamburg
Germany
+49 40 41 90 02 05 (Phone)
+49 40 41 90 03 02 (Fax)

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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