Carrots and Sticks in Bank Governance: Time for a Bigger Stick?

Purpose — This paper is pre-occupied with how bank governance can be altered to reduce risk taking and engender greater financial stability. Design/methodology/approach — Its approach is to review existing bank governance arrangements, contemporary challenges, and alternative reforms. Findings — It is argued that recent reforms are incomplete. Greater countervailing incentives for bank managers and shareholders are required. This prompts an inquiry into the merits and demerits of four types of reform: changes to executive compensation arrangements; the introduction of a liability standard for directors; the removal of limited liability for bank shareholders; and a criminal offence for managers. Originality/value — Discussion illumines several problems with the current approach to bank governance and provides insights that can help direct future reform

Whither Capitalism? Financial externalities and crisis

As with global warming, so with financial crises – externalities have a lot to answer for. We look at three of them. First the financial accelerator due to ‘fire sales’ of collateral assets -- a form of pecuniary externality that leads to liquidity being undervalued. Second the ‘risk- shifting’ behaviour of highly-levered financial institutions who keep the upside of risky investment while passing the downside to others thanks to limited liability. Finally, the network externality where the structure of the financial industry helps propagate shocks around the system unless this is checked by some form of circuit breaker, or ‘ring-fence’. The contrast between crisis-induced Great Recession and its aftermath of slow growth in the West and the rapid - and (so far) sustained - growth in the East suggests that successful economic progress may depend on how well these externalities are managed

Structural Power and the Politics of Bank Capital Regulation in the UK

This paper describes and explains a significant tightening in bank capital regulation in the UK since the 2008 financial crisis. The banks fiercely resisted the new capital regulations but in a novel theoretical contribution we argue that the structural power of business was reduced due to the changing ideas of state leaders, by changing institutional arrangements within the state and by wider open politicisation of banking reform