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Bank Decision-Making and Financial Stability: Who Should Have a Say? The Case for Granting Governance Rights to Bail-Inable Creditors

Dates:
  • Wed 03 Jun 2020 13.00 - 14.30
  Add to Calendar 2020-06-03 13:00 2020-06-03 14:30 Europe/Paris Bank Decision-Making and Financial Stability: Who Should Have a Say? The Case for Granting Governance Rights to Bail-Inable Creditors

Shareholders are the residual claimers on the assets of a corporation. On the contrary, creditors are fixed claimants and so that they are merely interested in the solvency of the borrower. Therefore, shareholders are usually thought to have optimal incentives to maximise the value of the corporation. This paper discusses the extent to which such common wisdom applies in banking. The paper proposes a deep statutory reform in the area of bank governance, exploiting the potential positive synergies with the resolution framework for distressed banks and, in particular, the incentive structure of the so-called bail-inable creditors . The overarching aim of such proposal is to fine-tune bank governance and incumbent substantive regulation and, subsequently, truly enhancing the quality of decision-making of banks in terms of risk-taking. At the same time, the proposed reform should increase the ex-ante credibility of resolution. Finally, this contribution operationalises such a theoretical construct, proposing to grant bail-inable creditors with a limited set of decision and appointment rights. This limited set of rights ought to be complemented by a general principle of sufficient accountability of bank’s governance arrangements toward bail-inable creditors, so to allow for differentiated and proportionate implementation. The analysis demonstrates how granting bail-inable creditors with ex-ante governance rights can represent a tool to correct for shareholders’ perverse incentives and make debt governance work in banking. This policy proposal would complement substantive regulation and the oversight activity of the competent authority. The governance role of creditors has the potential to be particularly helpful in preventing disproportionate risk-taking decisions in good times, when regulatory and supervisory standards are lax and systemic risk piles-up.

Speaker: Edoardo Martino (Ph.D. researcher, Erasmus School of Law | Research Associate, Amsterdam Center for Law & Economics)

Chair: Vasiliki Yiatrou (Ph.D. researcher, Department of Law, European University Institute)

To register for the event, please send an e-mail by 2 June 2020 to [email protected]. The paper and zoom link will be shared with registered participants prior to the event. For more information about the Finance, Innovation and Regulation Working Group and a full list of its upcoming or past events, please follow this link.

Outside EUI premises - DD/MM/YYYY
  Outside EUI premises -

Shareholders are the residual claimers on the assets of a corporation. On the contrary, creditors are fixed claimants and so that they are merely interested in the solvency of the borrower. Therefore, shareholders are usually thought to have optimal incentives to maximise the value of the corporation. This paper discusses the extent to which such common wisdom applies in banking. The paper proposes a deep statutory reform in the area of bank governance, exploiting the potential positive synergies with the resolution framework for distressed banks and, in particular, the incentive structure of the so-called bail-inable creditors . The overarching aim of such proposal is to fine-tune bank governance and incumbent substantive regulation and, subsequently, truly enhancing the quality of decision-making of banks in terms of risk-taking. At the same time, the proposed reform should increase the ex-ante credibility of resolution. Finally, this contribution operationalises such a theoretical construct, proposing to grant bail-inable creditors with a limited set of decision and appointment rights. This limited set of rights ought to be complemented by a general principle of sufficient accountability of bank’s governance arrangements toward bail-inable creditors, so to allow for differentiated and proportionate implementation. The analysis demonstrates how granting bail-inable creditors with ex-ante governance rights can represent a tool to correct for shareholders’ perverse incentives and make debt governance work in banking. This policy proposal would complement substantive regulation and the oversight activity of the competent authority. The governance role of creditors has the potential to be particularly helpful in preventing disproportionate risk-taking decisions in good times, when regulatory and supervisory standards are lax and systemic risk piles-up.

Speaker: Edoardo Martino (Ph.D. researcher, Erasmus School of Law | Research Associate, Amsterdam Center for Law & Economics)

Chair: Vasiliki Yiatrou (Ph.D. researcher, Department of Law, European University Institute)

To register for the event, please send an e-mail by 2 June 2020 to [email protected]. The paper and zoom link will be shared with registered participants prior to the event. For more information about the Finance, Innovation and Regulation Working Group and a full list of its upcoming or past events, please follow this link.


Location:
Outside EUI premises -

Affiliation:
Department of Law

Type:
Working group

Organiser:
Finance, Innovation & Regul. Working Group

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