Better Bankers, Better Banks: Promoting Good Business Through Contractual Commitment
University of Chicago Press, October 2015
16 Pages Posted: 12 Feb 2016 Last revised: 6 May 2016
Date Written: October 1, 2015
Every month — if not week — brings new reports of allegations, settlements, and, in some cases, admissions involving the banking industry, many involving the largest and best-known banks. The law has attempted to address these problems, but has not done so successfully. Indeed, society overall has not sufficiently condemned problematic behavior in banking and its underlying ethos. Rather, there seems to be popular fascination with this behavior, reflected in books and movies.
Our book, the introduction of which is posted here, argues for a different approach to the problem: an agreement — a covenant — between highly compensated bankers and their banks under which the bankers would be personally liable from their own assets for some of their banks’ debts and that they be personally liable from several years of their past, present, and future compensation for some portion of fines and fraud-based judgments (including settlements) against the bank. The liability would not be unlimited, but it should potentially adversely affect the banker’s standard of living. Ideally, the result would be a change not only in monetary and nonmonetary rewards in the banking industry, but also in what one might call the banking ethos, in banks and in the broader society, influencing what banker behavior is celebrated, accepted, and condemned. The book discusses various mechanisms by which covenant banking might be adopted. Voluntary adoption, perhaps done in response to pressure by stakeholders, regulators and/or judges, would be best; some banks might also seek a competitive advantage by touting their status as covenant banks.
The ultimate aim of covenant banking is a focus on banking as a profession, with bankers having greater responsibility for their conduct. The responsibility at issue is not just financial responsibility; it also encompasses a more holistic conception of a profession and a professional’s role in society. Banks are entitled to seek profits, but not at society’s expense. The law can do only so much; bankers’ internal compasses, and their colleagues’ compasses, need to do more. Society can do more as well, expecting more from its bankers.
Keywords: banks, financial crisis, personal liability, partnerships, responsibility
JEL Classification: G20, G21, G33, G38, K22, K23
Suggested Citation: Suggested Citation