Bank Governance: Lessons Still Not Learned

Policymakers learned the wrong lessons about bank governance from the 2008 financial crisis, and the collapse of Credit Suisse shows that the misconceptions persist. The central problem in banking is not the conflict between shareholders and management but the agency cost of debt: shareholders, boards and management together shift risk onto depositors, deposit insurers and taxpayers. Post-crisis reforms strengthened shareholder control and thereby amplified the problem, while supervision remains reactive, intervening only after losses have materialised. We propose preventive governance: restructuring incentives inside the bank before risk shifting can operate. Its most practical form gives the deposit insurer, the natural representative of dispersed creditors, the right to nominate professional directors to bank boards. The deposit insurer’s own balance sheet bears the cost of failure, so its incentives are aligned with stability rather than returns; nomination of qualified professionals, rather than appointment of officials, avoids the failures of politically appointed boards; and the mechanism strengthens governance even where the state itself is the controlling shareholder, where experience shows that shareholder thinking otherwise persists, and conflicts of interest are rife.