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Ethics versus Ethos in US and UK Megabanking

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  • Edward J. Kane

    (Boston College)

Abstract

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.

Suggested Citation

  • Edward J. Kane, 2018. "Ethics versus Ethos in US and UK Megabanking," Journal of Financial Services Research, Springer;Western Finance Association, vol. 53(2), pages 211-226, June.
    • Handle: RePEc:kap:jfsres:v:53:y:2018:i:2:d:10.1007_s10693-017-0288-z
    DOI: 10.1007/s10693-017-0288-z
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    References listed on IDEAS

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    8. Mr. C. A. E. Goodhart & Miguel A. Segoviano, 2015. "Optimal Bank Recovery," IMF Working Papers 2015/217, International Monetary Fund.
    9. Edward J. Kane, 2016. "A Theory of How and Why Central-Bank Culture Supports Predatory Risk-Taking at Megabanks," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 44(1), pages 51-71, March.
    10. Halliday, Terence C. & Carruthers, Bruce G., 1996. "The moral regulation of markets: Professions, privatization and the english insolvency act 1986," Accounting, Organizations and Society, Elsevier, vol. 21(4), pages 371-413, May.
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    Cited by:

    1. Franklin Allen & Itay Goldstein & Julapa Jagtiani, 2018. "The Interplay among Financial Regulations, Resilience, and Growth," Journal of Financial Services Research, Springer;Western Finance Association, vol. 53(2), pages 141-162, June.
    2. Allen, Franklin & Jagtiani, Julapa & Goldstein, Itay, 2018. "The Interplay between Financial Regulations, Resilience, and Growth," CEPR Discussion Papers 12861, C.E.P.R. Discussion Papers.
    3. Theoharry Grammatikos & Nikolaos I. Papanikolaou, 2021. "Applying Benford’s Law to Detect Accounting Data Manipulation in the Banking Industry," Journal of Financial Services Research, Springer;Western Finance Association, vol. 59(1), pages 115-142, April.

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