Quack Corporate Governance, Round III? Bank Board Regulation Under the New European Capital Requirement Directive
34 Pages Posted: 26 Mar 2014 Last revised: 21 Dec 2014
Date Written: October 1, 2014
After a crisis, broad and sweeping reforms are enacted to restore trust. Following the 2007-2008 Great Financial Crisis, the European Union has engaged in an ambitious overhaul of banking regulation. One of its centerpieces, the 2013 Fourth Capital Requirements Directive (CRD IV), tackles, amongst other things, the perceived pre-crisis failings in the governance of banks. We focus on the provisions that are aimed at reshaping bank boards’ composition, functioning, and their members’ liabilities, and argue that they are unlikely to improve bank boards’ effectiveness or prevent excessive risk-taking. We criticize some of them for mandating solutions, like board diversity and the separation of chairman and CEO, that may be good for some banks but are bad for others, in the absence of any convincing argument that their overall effect is positive. We also criticize enhanced board liability by showing that it may increase the risk of herd behavior and lead to more serious harm in the event of managerial mistakes. We also highlight that the push towards unfriendly boards will negatively affect board dynamics and make boards as dysfunctional as when the CEO dominates them. We further argue that limits on directorships and diversity requirements will worsen the shortage of bank directors, while requirements for induction and training and board evaluation exercises will more likely lead to tick-the-box exercises than under the current situation in which they are just best practices. We conclude that European policymakers and supervisors should avoid using a heavy hand, respectively, when issuing rules implementing CRD IV provisions with regard to bank boards and when enforcing them.
Keywords: Corporate Governance, Post-crisis reforms, Banking Regulation, Bank boards, CRD IV, CEO duality, Limits on directorships, Board diversity, Induction and Training, Boards’ Self-Evaluation
JEL Classification: K22, L51, G20, G21, G23, G28, G34
Suggested Citation: Suggested Citation