Between Prudential Regulation and Shareholder Value: An Empirical Perspective on Bank Shareholder Equity (2001-2017)

Abstract

We analyse the effects of changes in regulatory capital requirements under Basel III on the dynamic evolution of bank shareholder equity over time. Evidence from managerial and regulatory reports shows that bank shareholder equity stands between micro-prudential regulatory capital requirements and managerial pursuit of equity economising strategies. Shareholder value strategies see shareholders as the equity investment remuneration recipients. Micro-prudential regulators, in turn, address them as equity investment providers. With opposing cash streams, one orientation puts the other to a test. The article visualises this conflict by analysing the actual shareholder contribution to the bank equity position in nine case studies of European financial institutions between 2001 and 2017; our evidence-based financial analysis applies an innovative method to data directly extracted from financial statements, in order to measure this equity position evolution and assess bank equity dynamics in light of revised regulatory capital requirements and persistent assurance of shareholder value thriving in managerial reports. The choice of in-depth analysis of a sample of relevant case studies overcomes the absence of detailed data on changes in bank equity in existing databases.

The Contest on Corporate Purpose: Why Lynn Stout was Right and Milton Friedman was Wrong

“…Agency theory has driven the increasing financialisation of US corporations encompassing the increasing dominance of financial motives, financial markets, and financial institutions to focus continuously towards maximising shareholder value (Biondi & Graeff, 2020;Clarke, 2014a;Krippner, 2012;Useem, 1996;Van der Zwan, 2014), and the distribution of ever-larger dividends and share buy-backs to increase shareholder returns, and inflate executive reward through stock options (Lazonick, 2014;. Agency theory asserts shareholder value as the ultimate corporate objective which managers are incentivised and impelled to pursue:…”

“…These recurrent and critical short-term weaknesses imposed on companies by the doctrine of shareholder value are apparent in many systemic and corporate collapses in recent decades. The global financial crisis and its aftermath were demonstrably due to leading international banks placing their profitability and capacity to deliver shareholder value far above their capacity for risk management and commitment to customer service (Biondi & Graeff, 2020;Henwood, 1998;Smith, Clarke, & Rogers, 2017). As the fall-out from the financial crisis continued, successive banks that collapsed, including most spectacularly Lehman Brothers and the Royal Bank of Scotland, were revealed to have engaged in reckless practices to sustain their shareholders returns (Clarke, 2011;Clarke & Chanlat, 2009;FSA, 2011).…”