Bank Corporate Governance: A New Paradigm

Failures of the corporate governance of banking firms were one of the major causes of the 2007‐09 Great Financial Crisis. Various reforms have been enacted to ameliorate Governance standards, notably risk management and incentive systems; but the key driver remains the improvement of shareholders rights, with a view to ensuring sustainable value creation. Instead, in this paper it is argued that, to strive for a structural advance in the risk appetite framework of the banking firm, the fundamental assumption behind corporate governance – i.e. that the ultimate authority lies in shareholders (the “owners”) who detain exclusive voting rights – should be reconsidered. To start with, it is recalled that, according to the options enterprise model, the effective owners of a corporation can be identified with its debt holders. More specifically and more recently, in the case of banking firms, the bail‐in/resolution mechanisms enacted create new obligations and responsibilities for holders of subordinated debt: accordingly, the traditional corporate governance framework should be modified to allow – in appropriate forms – for their voting rights and presence in the Board of Directors/Supervisory Board.