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Better Bankers, Better Banks

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Better Bankers, Better Banks

Promoting Good Business through Contractual Commitment

University of Chicago Press,

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To reform banking, bankers must hold a personal financial stake in their banks.

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Editorial Rating

8

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  • Innovative

Recommendation

Neither billions in legal settlements nor all the regulations in the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act have deterred banks from irresponsible behavior. This dynamic won’t change unless bankers’ compensation also changes, write Claire A. Hill and Richard W. Painter of the University of Minnesota Law School. They propose a voluntary system – called “covenant banking” – that would make executives “contractually” liable from their personal assets for some portion of their bank’s losses and fines. Hill and Painter may idealistically overstate the capacity of this one specific reform – or any one specific reform – to transform the industry, but their history of banking is insightful and their proposal seems apt to generate thoughtful discussion. getAbstract recommends their detailed reporting to policy makers, bank directors, shareholders and anyone interested in how banks could avoid repeating the kinds of mistakes that sparked the 2007-2008 financial meltdown.

Summary

Why So Little Has Changed

Why do banks keep taking reckless risks, even when their actions imperil their companies and the US economy itself? The list of accusations keeps growing: Banks manipulate foreign-exchange rates, help clients conceal excess borrowing, conspire to manipulate a key benchmark for setting short-term interest rates, commit abuses in mortgage servicing and engage in “illegal practices in the sale of mortgage-backed securities.” The accused lenders include some of banking’s biggest names: “JPMorgan, Goldman Sachs, Citigroup, Morgan Stanley, Bank of America, Deutsche Bank, Barclays, Credit Suisse, UBS, RBS, Rabobank, BNP Paribas, and others.”

New laws after the 2008 economic crisis, such as the 2010 Dodd-Frank Wall Street Reform Act and its extensive regulations, haven’t stopped bad behavior. Regulations that specify prohibited conduct in detail may inadvertently promote the notion that actions not specifically forbidden are permissible. Tough enforcement hasn’t changed the game: By 2013, the big banks together faced fines, judgments and legal fees exceeding $100 billion. Part of regulatory challenge is that banks employ a variety of tactics to mask...

About the Author

Claire A. Hill and Richard W. Painter are professors at the University of Minnesota Law School. Hill directs the Institute for Law and Rationality, and Painter is a former associate counsel in the White House Counsel’s Office.

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