Who's Looking Out For The Banks?

63 Pages Posted: 18 Aug 2021 Last revised: 19 Apr 2022

See all articles by Jeremy C. Kress

Jeremy C. Kress

University of Michigan, Stephen M. Ross School of Business

Date Written: August 16, 2021

Abstract

When the Gramm-Leach-Bliley Act authorized financial conglomeration in 1999, Professor Arthur Wilmarth, Jr. presciently predicted that diversified financial holding companies would try to exploit their bank subsidiaries by transferring government subsidies to their nonbank affiliates. To prevent financial conglomerates from taking advantage of their insured depository subsidiaries in this way, policymakers instructed a bank’s board of directors to act in the best interests of the bank, rather than the bank’s holding company. This symposium Article, written in honor of Professor Wilmarth’s retirement, contends that this legal safeguard ignores a critical conflict of interest: the vast majority of large-bank directors also serve as board members of their parent holding companies. These dual directors are therefore poorly situated to exercise the independent judgment necessary to protect a bank from exploitation by its nonbank affiliates. This Article proposes to strengthen bank governance — and better insulate banks from their nonbank affiliates — by mandating that some of a bank’s directors must be unaffiliated with its holding company. As long as banks are permitted to affiliate with nonbanks, this reform is essential to ensure that someone is looking out for the well-being of insured depository institutions.

Keywords: Banks, Banking, Financial Holding Companies, Gramm-Leach-Bliley Act, Corporate Governance

Suggested Citation

Kress, Jeremy C., Who's Looking Out For The Banks? (August 16, 2021). 93 University of Colorado Law Review 897 (2022), Available at SSRN: https://ssrn.com/abstract=3905962 or http://dx.doi.org/10.2139/ssrn.3905962

Jeremy C. Kress (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

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