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Resolving troubled systemically important cross-border financial institutions: is a new corporate organizational form required?

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  • Christine Cumming
  • Robert A. Eisenbeis

Abstract

This paper explores the advantages of a new financial charter for large, complex, internationally active financial institutions that would address the corporate governance challenges of such organizations, including incentive problems in risk decisions and the complicated corporate and regulatory structures that impede cross-border resolutions. The charter envisions a single entity with broad powers in which the extent and timing of compensation are tied to financial results, senior managers and risk takers form a new risk-bearing stakeholder class, and a home-country-based resolution regime operates for the benefit of all creditors. The proposal is offered 1) to highlight the point that even in the face of a more efficient and effective resolution process, incentives for excessive risk taking will continue unless the costs of risk decisions are internalized by institutions, 2) to suggest another avenue for moving toward a streamlined organizational structure and single global resolution process, and 3) to complement other proposals aimed at preserving a large role for market discipline and firm incentives in a post-reform financial system.

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 457.

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Date of creation: 2010
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Handle: RePEc:fip:fednsr:457

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Related research

Keywords: International business enterprises ; Corporate governance ; Executives - Salaries ; Financial risk management ; Reward (Psychology) ; Bank charters;

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References

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  1. Douglas D. Evanoff & Larry D. Wall, 2000. "Subordinated debt as bank capital: a proposal for regulatory reform," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q II, pages 40-53.
  2. Robert A. Eisenbeis & George G. Kaufman, 2007. "Cross-border banking: challenges for deposit insurance and financial stability in the European Union," Working Paper 2006-15, Federal Reserve Bank of Atlanta.
  3. Douglas D. Evanoff & Larry D. Wall, 2000. "Subordinated debt and bank capital reform," Working Paper Series WP-00-7, Federal Reserve Bank of Chicago.
  4. Santiago Carbo-Valverde & Edward J. Kane & Francisco Rodriguez-Fernandez, 2009. "Evidence of Regulatory Arbitrage in Cross-Border Mergers of Banks in the EU," NBER Working Papers 15447, National Bureau of Economic Research, Inc.
  5. Robert A. Eisenbeis, 2006. "Home country versus cross-border negative externalities in large banking organization failures and how to avoid them," Working Paper 2006-18, Federal Reserve Bank of Atlanta.
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Cited by:
  1. DeYoung, Robert & Kowalik, Michal & Reidhill, Jack, 2013. "A theory of failed bank resolution: Technological change and political economics," Journal of Financial Stability, Elsevier, vol. 9(4), pages 612-627.

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