Experience in the run-up to the crisis suggests, if anything, the opposite. Paying in equity appears to have increased the probability of failure. Among US bank CEOs pre-crisis, the top five equity stakes were held by Dick Fuld (Lehman Brothers), Jimmy Cayne (Bear Stearns), Stan O’Neill (Merrill Lynch), John Mack (Morgan Stanley) and Angelo BIS central bankers’ speeches  7  Mozilo (Countrywide). This is not a random sample. 16 It also suggests the macro-economic costs of this principal/agent problem may have been non-trivial. (b)  Collective action problems: the “ownerless corporation”  A second stakeholder friction arises because a diffuse and dispersed set of shareholders are likely to find it difficult to corral management (Shleifer and Vishny (1986)). There is a coordination problem among shareholders. Moreover, most individual shareholders tend to have modest amounts of skin in the game. This reduces their incentives to exercise corporate control in the first place. This shareholder collective action problem is not new. It lay at the heart of Berle and Mean’s concern about “ownerless corporations” in the 1930s. But there are good reasons for believing this problem may have become more acute since then, as the shareholder base has become more fragmented and diffuse and shareholder co-ordination more difficult (Kay (2012)). One reason is that the role of institutional investors has changed. They have tended historically to play an important stewardship role. But this role has waned. As recently as 1990, pension funds and insurance companies held more than half of UK equities.

Some analysts have suggested that, because of capital market integration, real interest rates will equalize around the world, thus reducing the ability of national Central Banks to control inflation. However, this need not be the case. Indeed, the classic Mundell-Fleming analysis concludes that monetary policy should be more effective, rather than less, in the case of international capital mobility, although it can operate through different channels of transmission including the exchange rate. Furthermore, in many emerging countries, strong capital inflows confront monetary policy with a dilemma between pursuing internal and external objectives, in a context of rising inflationary pressures. Taming capital inflows would call for a relaxation of monetary policy, at the risk however of compromising on the domestic objective of maintaining low inflation. Sterilisation cannot always be relied upon to resolve this dilemma as it is likely to be ineffective in the long term and fuel other imbalances such as excessive accumulation of foreign exchange reserves. A second question is the potential for global contagion. As a direct consequence of cross-border financial integration, local price or liquidity shocks are more likely to spread around the globe. Large-scale liquidity creation resulting from monetary (or exchange rate) policy in one country may fuel asset price bubbles elsewhere. One current example might be seen in carry trades, which have become a major driver of a number of currencies, including the yen. Therefore, distant events can have sharp impacts, even on local institutions or investors. New contagion channels have emerged.