Federalizing Bank Governance

77 Pages Posted: 8 Feb 2021

See all articles by David Min

David Min

California State Senate; University of California, Irvine School of Law; University of California, Irvine School of Law; University of California, Irvine School of Law

Date Written: May 8, 2020

Abstract

Congress and federal financial regulators have long prioritized the safety and soundness of banking firms. But at the same time, the directors and officers of banking firms are legally bound to prioritize shareholder wealth maximization, which creates incentives for risk-taking that work against these regulatory goals. This shareholder primacy norm has long been a central feature of corporate governance, but as I describe in this Article its application to banks was not a deliberate policy choice but rather a historical accident. Indeed, banks possess several unique features that make shareholder wealth maximization an inapt governance priority for them. Banks are highly leveraged, which increases the importance of creditor agency costs. Banks also enjoy government guarantees, either explicit or implicit, on their short-term debt, and thus their governance is a matter of public concern. Finally, bank failures result in high negative externalities, and this also creates a strong public interest in bank safety and soundness.

This Article argues that a new federal governance regime for banking institutions is appropriate and consistent with the historical purposes of banking regulations and charter oversight in the United States. Furthermore, such a regime would reduce the tensions between the law of state entities and the sprawling federal banking regulatory framework created by Congress, and harmonize the internal governance of banking firms with the broader goals of external banking regulations. Finally, I offer some thoughts on the key principles that should be present in any such federal governance regime for banking.

For too long, we have tolerated a “cat-and-mouse” dynamic in banking, one in which regulators have sought to identify and address risky practices while knowing that the directors and officers of banking firms have strong incentives to take on higher risk. By changing this paradigm and realigning the incentives inherent in banking governance, we can take a major step towards ensuring long-term stability in our financial system.

Keywords: banking, governance, corporate governance, financial regulation

JEL Classification: E, G, M, N

Suggested Citation

Min, David, Federalizing Bank Governance (May 8, 2020). David Min, Federalizing Bank Governance, 51 Loyola Univ. Chicago L. J. 833 (2020), Available at SSRN: https://ssrn.com/abstract=3743083 or http://dx.doi.org/10.2139/ssrn.3743083

David Min (Contact Author)

California State Senate ( email )

State Capitol
Sacramento, CA 95814
United States
916-651-4037 (Phone)

University of California, Irvine School of Law ( email )

401 E. Peltason Dr.
Ste. 1000
Irvine, CA 92697-1000
United States

University of California, Irvine School of Law ( email )

401 E. Peltason Dr.
Ste. 1000
Irvine, CA 92697-1000
United States

University of California, Irvine School of Law ( email )

401 E. Peltason Dr.
Ste. 1000
Irvine, CA 92697-1000
United States

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