Control Rights (And Wrongs)

Abstract

Disclaimer: The views expressed are not necessarily those of the Bank of England or the Financial Policy Committee. In the 2011 Wincott Lecture, the author sets out a number of structural factors that have led banks to take on too much risk. The combination of limited liability for equity holders, tax biases that favoured debt over equity, the likelihood that banks would not be allowed to fail, and performance targets linked to short‐term equity returns meant that neither debt nor equity holders had an incentive to constrain bank risk taking. A number of solutions are offered which would better align these incentives with the public good.

The Triple Crisis of Western Capitalism

“…By the end of the 20th century and at the beginning of the 21st it was in the range of 20 to 30 per cent. 238 It is empirically evident that increasing leverage and higher volatility lead to a higher ROE. 239 Increasing leverage leads to a build-up of assets.…”

Implicit Bank Debt Guarantees: Costs, Benefits and Risks

“…By contrast, during normal times, policy makers tend not to make any announcement that could be interpreted as confirming the notion that such guarantees exist. More recently, numerous policy makers have clearly announced their intentions to rid banks of the benefits of such implicit guarantees given that they create costs on their own (see, for example, Dombret, ) and that they reflect other economic distortions (Haldane, ): ‘ Indeed, eliminating this subsidy has been taken as a bellwether of the authorities’ success in tackling the too‐big‐to‐fail problem ’.…”

“…Also, no precise definition for TBTF was provided, except that it meant that all deposits of the 11 banks considered TBTF were effectively protected by an implicit bank debt guarantee. Thus, the concepts of TBTF and implicit guarantees are closely related to each other, and the value of implicit guarantees might thus be a good measure to assess progress in limiting TBTF (Haldane, ; Siegert and Willison, ).…”

How the Financial Crisis Changed Our World

“…Andrew Haldane of the Bank of England discussed many of the most important problems in his 2011 Wincott Memorial Lecture (Haldane ).…”