Research explores how corporate law undermines financial stability

December 4, 2017 by Sheila Kiggins, University of Warwick
Research explores how corporate law undermines financial stability
Credit: University of Warwick

With the effects of the 2007 credit crunch still being felt around the world, a new book by Dr Andreas Kokkinis, Assistant Professor in the University of Warwick's School of Law, explores whether traditional models of corporate governance fail to promote financial stability.

Corporate Law and Financial Instability (Routledge, 2018) explores the tension between systems focused around shareholders who want to maximise their returns, and prudential regulation where risk-taking must be controlled in order to safeguard .

Virtually all large banks and other financial institutions in the UK and internationally are public limited liability companies whose shares are listed on one or several stock exchanges. As such, their corporate governance and, in particular, the incentives faced by their directors and are to a significant extent determined by corporate and securities law rules.

But, as Dr Kokkinis explains: "The corporate law regime, which focuses on shareholder empowerment and profit maximisation, encourages risky behaviour that may be in the best interests of individual shareholders, but is not in the broader public interest when it comes to the banking sector."

Dr Kokkinis' analysis suggests that: "Radical legal reform of directors' and senior managers' civil liability is necessary. This should take the form of a statutory provision making directors and senior managers liable to contribute to the assets of a financial institution that has failed up to a maximum amount."

Banks and other financial institutions are very different to typical corporations. In his book, Dr Kokkinis explains how the business of banking, its assets, its capital structure and its regulatory framework are very different to generic companies, and how these differences limit the ability of and creditor governance to curb excessive risk-taking by banks.

He said: "The limited ability of shareholders and creditors to restrain risk taking by financial managers, combined with the incentives the latter face to take excessive risk, means that financial institutions are likely to take even more risk than fully informed investors would accept. This has a knock-on effect on other financial institutions due to systemic risk, and can undermine the stability of the financial system as a whole."

Although the book's main focus is on UK law, much of the policy argumentation is relevant globally. Appropriate international comparisons are drawn, and analysis of EU law and regulation is included.

Dr Kokkinis added: "This book brings together most of my research over the best part of the last decade. Of course, it is not up to me to say if it is good or not, but I can definitely say that I have put all my mind and all my heart to it. I hope that colleagues and students will enjoy reading it."

Explore further: The crisis of shareholder primacy

More information: Corporate Law and Financial Instability (ISBN 9781138289130) is part of the Routledge Research in Corporate Law series: … p/book/9781138289130

Related Stories

The crisis of shareholder primacy

March 20, 2012

If we want to prevent the next financial crisis, a new model of corporate governance is needed to replace shareholder primacy in financial institutions. Gates Scholar Mike Marin explains why.

Risk management critical to corporate strategy

January 7, 2009

With the consequences of the current financial crisis spreading to the real economy, lawmakers are exploring new regulations to govern the financial markets. The concern among market participants is that policy-makers do ...

Recommended for you

Nanoscale Lamb wave-driven motors in nonliquid environments

March 19, 2019

Light driven movement is challenging in nonliquid environments as micro-sized objects can experience strong dry adhesion to contact surfaces and resist movement. In a recent study, Jinsheng Lu and co-workers at the College ...

OSIRIS-REx reveals asteroid Bennu has big surprises

March 19, 2019

A NASA spacecraft that will return a sample of a near-Earth asteroid named Bennu to Earth in 2023 made the first-ever close-up observations of particle plumes erupting from an asteroid's surface. Bennu also revealed itself ...

The powerful meteor that no one saw (except satellites)

March 19, 2019

At precisely 11:48 am on December 18, 2018, a large space rock heading straight for Earth at a speed of 19 miles per second exploded into a vast ball of fire as it entered the atmosphere, 15.9 miles above the Bering Sea.


Please sign in to add a comment. Registration is free, and takes less than a minute. Read more

Click here to reset your password.
Sign in to get notified via email when new comments are made.