Citation

Discussion Paper Details

Please find the details for DP13494 in an easy to copy and paste format below:

Full Details

Title: Equity Finance: Matching Liability to Power

Author(s): Charles A Goodhart and Rosa M Lastra

Publication Date: January 2019

Keyword(s): Banking, banks, corporate governance, institutional investors, limited liability, Senior Management Regime and Two Tier Equity

Programme Area(s): Monetary Economics and Fluctuations

Abstract: There is widespread concern that the bonus culture for senior managers in limited liability companies is having adverse effects, e.g. on risk-taking, leverage and lower longer-term investment. The moral hazard of limited liability was appreciated in the 19th century, when unlimited or multiple liability, especially for bankers, was widely adopted. Whereas outside, notably retail, investors still need the protection of limited liability, we advocate moving towards a two-tier equity system, primarily for banks, with insiders, senior managers and others with influence over corporate decisions, becoming subject to multiple liability. But the transition costs of doing so suddenly would be great, so our proposal is to start by applying this initially just to Systemically Important Financial Intermediaries.

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Bibliographic Reference

Goodhart, C and Lastra, R. 2019. 'Equity Finance: Matching Liability to Power'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=13494