Bank corporate governance: a proposal for the post-crisis world

The corporate governance problems of banks are qualitatively and quantitatively different from those of other firms. The authors argue that a key factor contributing to this difference is the growing opacity and complexity of bank activities, a trend that has increased the difficulty of managing risk in financial firms. They also cite the governance challenges posed by the holding company organization of banks, in which two boards of directors—the bank’s own board and the board of the holding company that owns the bank—monitor the bank. This paradigm results in significant confusion about the role of bank holding company directors: While regulators focus on directors’ safety and soundness responsibilities, state corporate laws governing the conduct of managers focus on the conflicting goal of maximizing shareholder wealth. Reviewing the existing solutions to bank corporate governance problems, the authors argue that it is time to impose a more rigorous standard of conduct on bank directors. They contend that “post-crisis” bank directors should be held to high professional standards rather than the amateur standard that governs directors generally, and they propose “banking expert” requirements for risk committee members akin to the requirements that Sarbanes-Oxley imposes on audit committees. They further assert that all bank directors should be “banking literate,” possessing the specialized knowledge needed to monitor and control risk taking in complex banking institutions