Download Policy Actions to Mitigate Bank

Corporate Governance of Financial Institutions:
What’s Special About Banks?
Luc Laeven (IMF)
Keynote Lecture
DNB Conference, Nov 8, 2012
The views expressed here are my own and should not be
interpreted to reflect those of the IMF or IMF Board
106
106
106
106
102
98
Latvia
2008
Cameroon
1987
Lebanon
1990
Ecuador
1982
109
Ireland
2008
32
Macedonia
1993
Turkey
2000
31
73
68
65
63
Nigeria
1991
72
Tanzania
1987
83
Indonesia
1997
88
Iceland
2008
Fiscal cost
Ireland
2008
(In percent of GDP)
Argentina
2001
41
Uruguay
1981
Chile
1981
108
Congo, Rep
1992
Guinea-Bissau
1995
Korea
1997
32
Jordan
1989
Thailand
1997
130
Burundi
1994
Ireland
2008
43
Congo, DR
1991
44
Chile
1981
44
Kuwait
1982
55
Thailand
1997
44
Jamaica
1996
Iceland
2008
57
Argentina
1980
Indonesia
1997
Costliest banking crises since 1970s
(In percent of GDP)
Increase in debt
103
82
(In percent of GDP)
Output loss
143
121
Source: Laeven and Valencia (2012)
Stealing “other people’s money”
“HSBC’s head of compliance quits after money laundering
allegations” (Telegraph, July 17, 2012).
“I may like many bankers, but I rather dislike banks. I
recognize their necessity, but fear their irresponsibility. Worse,
they are irresponsible partly because they know they are
necessary. No industry has a comparable talent for privatizing
gains and socializing losses. Participants in no other industry
get as self-righteously angry when public officials –
particularly, central bankers – fail to come at once to their
rescue when they get into (well-deserved) trouble.” (Martin
Wolf, Financial Times, Jan 15, 2008).
What’s special about banks?
•
•
•
•
They are highly leveraged
They have diffuse debtholders
They are large creditors
They are systemically important
• Deposit insurance and financial regulation
I. Limits of traditional corporate
governance
•
•
•
•
Concentrated ownership
Executive pay
Market for corporate control
Large creditors
II. Bank regulation and systemic risk
•
•
•
•
Externalities from bank failures
Bank performance and systemic risk
Regulation and governance interact
Regulatory forbearance
Volatility and correlation of weekly stock returns
Large and complex US financial institutions, 1980-2011
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
2010
2005
2000
1995
1990
1985
1980
0%
Annual volatility of weekly returns of US banks, unweighted average
Correlation of returns
Source: Datastream. Based on weekly stock returns. Sample of large and complex
US financial institutions as defined in Gary H. Stern, Ron J. Feldman, 2004,
Too big to fail: the hazards of bank bailouts” Brookings Institution Press, (Box 4.1, page 39).
Regulatory forbearance
• “Publicity is justly commended as a remedy
for social and industrial diseases. Sunlight is
said to be the best of disinfectants; electric
light the most efficient policeman (Brandeis,
1914)”
• “The only meaningful distinction between
man and machine is moral hazard” (Boot and
Thakor, 1993)
Regulatory forbearance during crises
2.0
0.16
1.8
0.14
1.6
0.12
1.4
1.2
0.10
1.0
0.08
0.8
0.06
0.6
0.04
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
0.4
Market-to-book value of equity (LHS)
Regulatory capital ratio (RHS)
Source: Call Reports of U.S. Bank Holding Companies, Median Values
III. Dealing with systemic risk
•
•
•
•
•
Government ownership
Macroprudential regulation
Capital
Resolution
Government bailouts
The fall of Bankia
Bankia’s price-to-book value of equity, 2012
0.6
July 20, 2011: IPO at 54% discount
0.5
May 10: Conversion of
4.5 bn preference shares
0.4
0.3
0.2
0.1
May 25: 19 billion bailout + reinstated
2011 account to 4.3 bn loss
0
1/1/2012
2/1/2012
3/1/2012
Source: Bloomberg
4/1/2012
5/1/2012
6/1/2012
IV. Policy implications
• Bank regulations must be custom designed
and adapted to financial governance systems
• Governance is insufficient:
Need macroprudential regulation
• Enforcement of regulation needs to be
enhanced
• Need more capital
• Need to improve resolution frameworks
V. Conclusions