Table of Contents

Research Handbook on International Banking and Governance

Research Handbook on International Banking and Governance

Elgar original reference

Edited by James R. Barth, Chen Lin and Clas Wihlborg

The contributors – top international scholars from finance, law and business – explore the role of governance, both internal and external, in explaining risk-taking and other aspects of the behavior of financial institutions. Additionally, they discuss market and policy features affecting objectives and quality of governance. The chapters provide in-depth analysis of factors such as: ownership, efficiency and stability; market discipline; compensation and performance; social responsibility; and governance in non-bank financial institutions. Only through this kind of rigorous examination can one hope to implement the financial reforms necessary and sufficient to reduce the likelihood and severity of future crises.

Chapter 15: The Governance of ‘Too Big to Fail’ Banks

Andy Mullineux

Subjects: economics and finance, money and banking


Andy Mullineux 15.1 INTRODUCTION The 2007–2009 global financial crisis (GFC) revealed significant inadequacies in the corporate governance and the regulation and supervision of banks. Large, complex or interconnected banks, with the notable exception of Lehman Brothers in October 2008, were bailed out and/or merged with other banks because of the systemic risks they posed. They were judged too important to be allowed to fail, or ‘too big to fail’ (TBTF). Many banks, including large ones (e.g., Merrill Lynch, an investment bank, and Washington Mutual, WaMu, a mortgage lender) were merged with others (Bank of America in these cases) to form even bigger banks, despite a regulatory rule that no bank in the US should have more than a 10 per cent market share. Concentration in banking in the US and elsewhere has thus increased. Bank bondholders (including providers of Tier 2 and some Tier 1 capital – see have generally been protected (except in cases such as Lehman’s and WaMu) and, post-Lehman, bank bond issuance has been guaranteed by governments in the EU and the US, and more widely. Meanwhile, the Federal Deposit Insurance Corporation (FDIC) in the US has been able to allow numerous (non-TBTF) banks to fail under its bank resolution arrangements, with the protected deposits transferred to other banks promptly. In addition, the US deposit insurance (DI) cover was raised from US$100 000 to US$250 000 to reassure depositors. DI was effectively extended by the Fed (the Federal Reserve System, the US central banking...

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