Fiduciary Duties’ Demanding Cousin: Bank Director Liability for Unsafe or Unsound Banking Practices

The term unsafe or unsound banking practices serves as a statutory trigger for virtually every key administrative sanction available against bank directors. Congress has not defined either the term unsafe or unsound banking practices or its counterpart safety and soundness, leaving the federal banking agencies considerable discretion in the interpretation and application of the term. Given the potential breadth of the term, the banking agencies have the ability to seek administrative remedies in cases covering a broad range of director conducL Thus, unsafe or unsound banking practices is a potent source of director liability. Professor Schooner argues that unsafe or unsound banking practices and the common law fiduciary duty of care appear to share the same theoretical basis. Although both concepts are derived from negligence theory, Professor Schooner shows that they retain certain vital differences in application. In cases brought by the FDIC or the RTC as receivers for failed banks against bank directors for breach of the fiduciary duty of care, the business judgment rule requires courts to defer to directors\u27 business decisions. In reviewing administrative actions against bank directors for unsafe or unsound banking practices, however, courts must defer to the banking agencies\u27 determinations. Professor Schooner argues that, as a result of this difference in application, the principles of safety and soundness create a higher standard of care for bank directors than that imposed by the common law fiduciary duty of care. She suggests that this inconsistency proves most troublesome in the context of the agencies\u27 cease and desist power. She concludes that the banking agencies could remedy this inconsistency by adopting policies that implement any of several modest restraints on the potential breadth of the safety and soundness principle

Top-Down Bank Capital Regulation

In proposing a top-down system of capital regulation, this Article shares a precautionary attitude toward bank regulation found increasingly in post-Financial Crisis scholarship. The viewpoint is one that favors ex ante financial regulation in which regulators are charged with avoiding public harm. More broadly, this Article rejects the notion that regulation is the enemy of markets and therefore must be minimized. Regulation is viewed neutrally—neither inherently good nor inherently bad—as a co-existing partner in highly complex and ever evolving financial markets. To develop the case for a top-down system of capital regulation, this Article continues as follows, Part II describes the normative foundations of bank regulation—setting the stage for the examination of the importance of capital regulation. Part III overviews the distinctive elements of rulemaking and supervision in the bank regulatory regime. Part IV briefly maps the development of capital regulation and surveys the current rules and supervision. Part V considers the limitations of capital regulation, which serve as the foundation for proposals for significantly higher capital. Finally, Part VI sets forth a proposal in support of higher capital ratios through the top-down mechanism

Private Enforcement of Systemic Risk Regulation

The failure of the regulatory system is at least one of the contributing causes to the 2008 Financial Crisis. The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) will have a far-reaching impact on the financial services industry particularly in its attempt to regulate systemic risk. The Dodd-Frank Act, however, does not sufficiently address the problem of agency discretion generally, or the problem of an agency’s discretion to forebear, in particular. Under Dodd-Frank, the agencies retain considerable discretion and the effectiveness of the new regime depends on the optimal exercise of such discretion. This Article maintains that an effective regulatory regime should include some check on agency discretion and focuses specifically on the issue of agency enforcement. The article considers whether private monitoring could enhance the current public enforcement regime in preventing systemic crisis. The article proposes a hybrid public/private qui tam model of enforcement as a potentially valuable enhancement to systemic risk reform

Bank Insolvency Regimes in the United States and the United Kingdom

Bank insolvency regimes vary widely. First, many countries maintain separate bank insolvency rules from those that govern insolvency of other firms or individuals. Other countries have no special regime and rely on their general insolvency law for bank closure. Second, some countries rely on an administrative process for bank closure in which the bank supervisor, bank insurer, or other agency has the power to appoint the conservator or receiver, and, in some instances, may appoint itself to the job. Other countries rely on a judicial process in which the bank supervisor (or bank managers or creditors) must apply to the court for the appointment of a conservator or receiver. A comparison of the United States and United Kingdom bank insolvency regimes reflects many of the different approaches used throughout the world. The U.K. system relies on general insolvency law for the closure of banks. The system is judicial in that a court decides whether a bank is insolvent and insolvency is the only basis for closing the bank. In contrast, the U.S. system for bank closure is administrative and derives from banking law. Bank supervisors determine insolvency, and under some circumstances may close even a solvent bank

Central Banks’ Role in Bank Supervision in the United States and United Kingdom

Driven in part by the question of bank supervision in euro-area countries, a growing body of literature addresses whether central banking and bank supervision should be combined. This paper address this debate in light of recent legislation in the United Kingdom and the United States. Recent legislation in the United Kingdom stripped the Bank of England of its responsibility for bank supervision and established the Financial Services Authority as an integrated supervisor of financial services. In the United States, the Gramm-Leach-Bliley Act of 1999 expanded the regulatory authority of the Federal Reserve. In light of international trends, I consider how the separation of monetary policy and bank supervision in the United Kingdom versus the combination of those functions in the United States stacks up against the empirical and theoretical literature. I conclude that the approaches in both countries rely on untested elements. I make predictions for the future role of the central banks in the United States and United Kingdom and some recommendations for reform

Fiduciary Duties’ Demanding Cousin: Bank Director Liability for Unsafe or Unsound Banking Practices

The term unsafe or unsound banking practices serves as a statutory trigger for virtually every key administrative sanction available against bank directors. Congress has not defined either the term unsafe or unsound banking practices or its counterpart safety and soundness, leaving the federal banking agencies considerable discretion in the interpretation and application of the term. Given the potential breadth of the term, the banking agencies have the ability to seek administrative remedies in cases covering a broad range of director conducL Thus, unsafe or unsound banking practices is a potent source of director liability. Professor Schooner argues that unsafe or unsound banking practices and the common law fiduciary duty of care appear to share the same theoretical basis. Although both concepts are derived from negligence theory, Professor Schooner shows that they retain certain vital differences in application. In cases brought by the FDIC or the RTC as receivers for failed banks against bank directors for breach of the fiduciary duty of care, the business judgment rule requires courts to defer to directors\u27 business decisions. In reviewing administrative actions against bank directors for unsafe or unsound banking practices, however, courts must defer to the banking agencies\u27 determinations. Professor Schooner argues that, as a result of this difference in application, the principles of safety and soundness create a higher standard of care for bank directors than that imposed by the common law fiduciary duty of care. She suggests that this inconsistency proves most troublesome in the context of the agencies\u27 cease and desist power. She concludes that the banking agencies could remedy this inconsistency by adopting policies that implement any of several modest restraints on the potential breadth of the safety and soundness principle

Recent Challenges to the Persistent Dual Banking System

This essay begins with a brief discussion of the history of the dual banking system in Part I. Part II reviews the justifications for, and criticisms of, the dual banking system. Part III details the recent challenges to the dual banking system. Part IV looks to the future of the dual banking system and concludes that Congress has chosen not to preempt entirely the states\u27 authority despite the continued erosion of states\u27 authority over safety and soundness issues. This leaves the states with a continuing opportunity to serve as laboratories of innovation in bank regulation. If the states seize this opportunity, their role in the regulation of banks will persist inevitably regardless of political fortune

Regulating Risk Not Function

This Article examines our current scheme of bank regulation through an analysis of banks\u27 securities activities -- how such activities are currently regulated and how they might be regulated in the future. Part I summarizes the major restrictions on banks\u27 securities activities, emphasizing recent regulatory initiatives aimed toward expanding banks\u27 participation in the securities business. Part II examines the application of the federal securities laws to banks\u27 securities activities. (While banks enjoy some exemptions from the federal securities laws, they are subject to many of the most important provisions.) In addition, Part II sets forth the division of responsibility for administering the securities laws among the federal banking regulators and the SEC. Part III analyzes the current paradigm of regulation of banks\u27 securities activities and concludes that the current model combines elements of functional and institutional regulation in form. Yet, once actual bank securities activities are taken into consideration, the current model more closely resembles functional regulation and, therefore, can be designated the functional equivalent to functional regulation. Part IV evaluates the current model of regulation of banks\u27 securities activities using the conventional understanding of the goals of the federal banking laws and the federal securities laws. This Part concludes that, given the current dimensions of actual bank securities activities, the incumbent model provides an acceptable compromise between the benefits of the functional model and those of the institutional model. Part V considers the durability of our current system of regulation and proposals for reform which seek only to provide more pure functional regulation. Part V concludes that the current model will not endure in an era of expanded bank securities activities and financial market consolidation. Part V contends that a system of regulation which is divided by risk is better suited to the financial markets of the future