Ethics versus Ethos in US and UK Megabanking

• Published in: Journal of financial services research Vol. 53; no. 2-3; pp. 211 - 226
• Main Author: Kane, Edward J.
• Format: Journal Article
• Language: English
• Published: New York Springer US 01.06.2018; Springer Nature B.V
• Subjects: Banking industry; Economics and Finance; Equity stake; Ethics; Fiduciary responsibility; Finance; Financial Services; Insolvency; Legitimacy; Macroeconomics/Monetary Economics//Financial Economics; Safety regulations; Stockholders; Subsidies; United Kingdom > UK; United States > US; Theft by safety net; Ethical obligations of bankers and regulators; Kant’s second moral imperative; Regulatory culture; Taxpayers’ equity stake in hard-to-fail banks; Megabank culture
• ISSN: 0920-8550; 1573-0735
• DOI: 10.1007/s10693-017-0288-z

Company law in the US and UK fails to acknowledge that authorities’ propensity to rescue giant banks from the consequences of insolvency creates an implicit contract that assigns taxpayers a coerced and badly structured equity stake in too-big-to-fail institutions. The entrenched managerial norm of maximizing stockholder value abuses this stake. It does so by lending an undeserved moral legitimacy to efforts by TBTF managers to take on dangerous levels of tail risk because their bank’s deep downside is effectively eliminated by the prospect of unlimited taxpayer support. Conventional tools of prudential regulation constrain but do not de-legitimate this behavior. To accomplish that end, this paper calls for: (1) a formal recognition of the fiduciary duties and dividends that TBTF firms owe to taxpayers and (2) criminalizing aggressive pursuit of safety-net subsidies as a form of public endangerment.