Safe Bank

The paper argues that re-regulating finance while preserving and augmenting its stakeholder-oriented component – as opposed to the shareholder/profit maximizingcomponent – is needed not only to restore the stability of finance, but also to mend the market economy, saving it. Answering the question why financial re-regulation is advancing so slowly, this paper addresses the historical example of re-regulation of the 1930s. It argues that the lack of a strong prosecutor, such as Ferdinand Pecora in 1933, made the progress of the reform more difficult. It asserts that a serious re-regulation is the only way out to restore financial stability. Appropriate leadership will be needed to secure a reasonably rapid and smooth transition. Finally, the paper analyses why we need Stakeholder Finance.

The paper analyses the notion of banking ethics and presents a simple model of risk shifting that illuminates the conflict between depositors and shareholders and presents shareholder incentives to gamble “with other peoples’ money”. Customer ownership through cooperative or savings bank structure solves this problem, however, these structures have problems of their own. Finally, it stresses the benefits of organizational diversity in banking, on how banks in different ownership structures may foster that diversity, and also why ownership may not be a sufficient condition for diversity.

Until about 25 years ago, almost all European countries had a so-called “three pillar” banking system comprising private banks, public savings banks and (mutual) cooperative banks. Since that time, several European countries have implemented far-reaching changes in their banking systems, which have more than anything else affected the two “pillars” of the savings and cooperative banks. The paper first describes these changes and points out the specific situation in Germany, as this country is almost unique in so far as the German savings banks and cooperative banks have maintained most of their traditional features. The article then describes the structure of the German “Three-Pillar” banking system and the place and role of savings and cooperative banks in it and concludes with a plea for diversity of institutional forms of banks by arguing why it is important to safeguard the strengths of those types of banks that do not conform to the model of a large shareholder-oriented commercial bank.

The global financial crisis of 2008 highlighted the riskiness of the pre-crisis bank model and demonstrated that in many cases the benefits of diversification from traditional banking have been overstated. With countless cases of nationalization or forced takeovers of failing banks, questions have been raised as to the proper size and scope of banking activities. Retail banking carried out by locally-based, small institutions, such as credit unions, mutual savings banks, building societies or cooperative banks, has for years played an important role in local environments, enhancing bank reputation and trust. The financial crisis has highlighted the
advantages of alternative business models of banks, aimed not only at maximizing short-term profits but also at the fulfillment of some social objectives; thus the aim of the paper is to analyze the position and challenges for the cooperative banking sector, based on the Polish experience.

This paper analyses the difference in the CSR commitment between different types of banks, based on the German example. It compares the three traditional groups (Commercial, Cooperative and Savings Banks) and a new type of bank which emerged in the 1980s: ethical banks. For each of these four types of financial institution, the main objective is to see if there is a difference between what the banks declare (through analysis of CSR policies in their annual reports) and what the banks actually do (through analysis of their financial statements). The conclusion is that a sincere commitment to CSR involves a substantial change in the banks business model. An analysis of the banking industry shows that only a few institutions are ready to take a step forward in this direction.

It is widely agreed that banks play a growth-enhancing role for the real economy. However, distorted incentives around bank insolvency may corrupt banks’ credit allocation and monitoring – ultimately leading to suboptimal real economic performance. The outcomes of such distorted incentives are suboptimal credit allocation and monitoring – which is felt in the real economy: Not the
projects and firms that need (and deserve) credit most on grounds of economic viability and profitability, but those that have particular risk- or asset-profiles are now favored by incentive-corrupted financial intermediaries. The results strongly advocate putting bank insolvency and resolution regimes center stage in discussions towards reforming bank regulation. In the European context, this calls for particular emphasis on the common resolution framework and the Single Resolution Mechanism as a vital part of the European Banking Union.

Existing resolution tools proved mostly inappropriate when governments were confronted with seriously distressed banks during the global financial crisis and the subsequent European sovereign debt crisis. Bank regulators and legislators have realized the importance of effective and appropriate bank resolution mechanisms and have brought into force significant changes to resolution regimes in an effort to prevent future crises. This article deals with the question whether resolution mechanisms can discipline banks. We revisit economic theory to determine the requirements for resolution mechanisms to induce incentives for prudent bank
behavior and apply this concept in order to examine one particular change in resolution regulation, the introduction of the Orderly Liquidation Authority. Taken together, we find that the Orderly Liquidation Authority can be interpreted as a significant improvement to the U.S. resolution regime.

The financial crisis has highlighted the faulty structures of managerial staff remuneration incentives and systems in financial institutions. Consequently, regulators in the European Union and the United States have introduced a number of regulations regarding the levels and structures of remunerations of executives in financial institutions. However, these recommendations were only an outline of the changes that should be made, not providing specific solutions in terms of implementation. Consequently, the paper analyses the effectiveness of these regulations and presents some recommendations.