Corporate governance of banks

This chapter explores the corporate governance of banks, with a particular focus on systemically important banks. It argues that the systemic nature of banks' business models, coupled with the limitations of external prudential regulation and supervision, necessitates a special regime for bank corporate governance. Indeed, governance interventions are a key part of an effective prudential framework. The chapter further demonstrates that regulators in both the EU and the US have taken steps to intervene in bank governance. Despite the emerging consensus in post-crisis literature that shareholders have perverse incentives, the regulatory frameworks in the EU and US have not substantially shifted towards de-linking bank corporate governance from shareholders. Some reforms do aim to detach decisions in banks from shareholder value. The cap on variable compensation in the EU is the clearest example of such intervention. Yet, other measures seem to actively encourage more shareholder involvement and point fingers at corporate governance mechanisms - such as short-term performance-based compensation packages - that encourage decision-makers to increase short-term gains to the detriment of long-term shareholder value. Ultimately, this chapter underscores the complexity and ongoing challenges in aligning bank governance with broader financial stability objectives.