24-06-2013, 04:30 PM
Corporate Governance of Financial Institutions
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Abstract
We identify the tension created by the dual demands of fi nancial institutions to be value-maximizing
entities that also serve the public interest. We highlight the importance of information in
addressing the public’s desire for banks to be safe yet innovative. Regulators can choose several
approaches to increase market discipline and information production. First, they can mandate
information production outside of markets through increased regulatory disclosure. Second, they
can directly motivate potential producers of information by changing their incentives. Traditional
approaches to bank governance may interfere with the information content of prices. Thus, the lack
of transparency in the banking industry may be a symptom rather than the primary cause of bad
governance. We provide the examples of compensation and resolution. Reforms that promote the
quality of security prices through information production can improve the governance of fi nancial
institutions. Future research is needed to examine the interactions between disclosure, information,
and governance.
Introduction
Possibly no other set of firms has been as closely examined in the past few years
as banks and financial institutions.1
The Government Accountability Office was recently commissioned to generate a
price estimate of the financial crisis, but the true cost will remain unknown for years—
families uprooted, young adults unable to join the workforce, business owners faced with
bankruptcy when credit lines disappeared overnight (Johnson 2011).
Since the beginning of the financial crisis in 2008,
countless papers and policies have been proposed, discussed, and enacted on nearly every
aspect of banking and finance. The bulk of this attention almost certainly springs from
the crisis, which became a powerful reminder of the importance of the financial system.
The financial crisis transformed into a grim reality the academic assertion that a healthy
economy cannot exist without a well-functioning financial system.
What Does a “Good” Financial Institution Look Like?
In the United States, the legal status of many financial institutions as publicly
listed companies means that corporate law treats them much like nonfinancial
institutions. Perhaps accordingly, much of the research on the corporate governance of
financial institutions has used governance and performance measurements based on value
maximization. While we think this is a reasonable approach, we believe that the financial
crisis was a powerful reminder that financial institutions are unique.