DP13494 Equity Finance: Matching Liability to Power

Author(s): Charles A Goodhart, Rosa M Lastra
Publication Date: January 2019
Date Revised: January 2019
Keyword(s): Banking, banks, corporate governance, institutional investors, limited liability, Senior Management Regime, Two Tier Equity
JEL(s): G30, G32, G39, K20, K22, K29, L14, L20, L21, M14, N20, N21, N23, P10
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13494

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.