My alternative view is that, especially where megabank risk exposures and capital positions are hard to detect and easy to shuffle across jurisdictions, taxpayer loss exposures in poorly supervised venues will expand over time unless the consequences of such shuffling are closely monitored in parent and host countries alike. To lessen the likelihood of systemic breakdowns that this behavior entails, the second half of the paper argues that society needs to develop more accurate measures of bank and regulatory performance. But to reorient the cultures of regulation and megabank management, the value of taxpayers’ coerced equity stake in megabanks must be incorporated into a more self-enforcing contract structure, one that pay a fair dividend on taxpayers’ equity stake and empowers citizens to hold officials accountable for the tradeoffs they make between taxpayer and stockholder interests. Difficulty of Controlling Incentive Conflict Any system of government generates different costs and benefits for differently situated citizens and corporations. Megabankers accumulate political clout to make sure that governments will treat them “fairly” and eliminate “unnecessary” regulatory compliance costs. In banking, depositors and other outside stakeholders may be exposed to loss from fraud, leverage, or earnings volatility without being adequately informed or compensated for the risks entailed. To reduce their exposure to these three types of predatory risk shifting, a bank’s counterparties deploy three remedies: (1) they require the bank to bond itself in various ways to behave honestly and fairly; (2) they negotiate a deterrent right to punish opportunistic behavior; and (3) they monitor information on the bank’s ongoing performance and condition. Bonding, policing, and monitoring are not costless. The costs vary inversely with the transparency provided by the accounting and disclosure regime under which the bank operates.
regulatory staffmembers. Managers may succeed in demonizing the whistleblower Auditor-Initiated Path Auditor finds irregularities and either quits, is fired, or issues a qualified report Managers concoct a persuasive cover story for the impasse. Regulators may ignore the audit impasse Creditor-Driven Path News about auditor issues, leaks, or autonomous rumors undermine depositor confidence or the confidence of suppliers of interbank loans Managers may collateralize and/or pay very high interest on large deposits or interbank loans Central bank may replace private funding with discount-window loans EXHIBIT 5 AIG Stock Never Became Valueless EXHIBIT 6 REFERENCES Axelrod, Robert, 1997. The Complexity of Cooperation: Agent-Based Models of Competition and Collaboration. Princeton: Princeton University Press.
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