Bank Governance: Lessons Still Not Learned

Policymakers learned the wrong lessons about bank governance from the 2008 financial crisis—and the response to Credit Suisse's collapse demonstrates that these misconceptions persist. Post-crisis commentators blamed agency conflicts between shareholders and management, focusing on short-term behaviours. The real culprit was risk-shifting: shareholders, boards, and management together transferring risk to debtholders and taxpayers. The policy response was counterproductive: say-on-pay provisions, deferred equity compensation, and enhanced shareholder engagement do not reduce risk-taking—they amplify it. Supervision failed to prevent risk-shifting because regulators operate reactively, intervening only after problems materialise. Credit Suisse exemplifies this dynamic: despite repeated regulatory interventions, its shareholder value-oriented board continued to pursue ever riskier strategies. Concrete solutions exist, but they require fundamental reform of managerial compensation and of the role of boards and supervisors. Instead of exclusive equity-based compensation, regulators could impose pay that aligns with creditors' interests and financial stability. More boldly, banks could adopt structures giving creditors and supervisors governance powers commensurate with risk exposure. The point is to move from reactive supervision—which attempts to constrain risk-shifting after the fact—to prophylactic governance: restructuring the incentive environment so that risk-shifting cannot operate effectively, rather than treating its symptoms after they have manifested themselves.