The history of the banking industry reveals a number of examples of failure. The governmental approach to individual bankers who lead banks that ultimately fail varies by country.
What’s Inside?
Governments around the world have a variety of ways that they treat high-profile bankers whose institutions collapse. In different countries, punishments may range from barring those leaders from holding directorship positions to being convicted of criminal conduct and serving time in prison. But few, if any, bankers have faced criminal charges related to the 2008 financial crisis, unlike the savings and loan crisis in the 1980s when more than 800 U.S. bankers were jailed.
How Is This Article Useful to Practitioners?
This research contrasts the approaches taken by different nations to address—or disregard—the possible wrongdoing of bankers preceding and during the 2008 global financial crisis.
The reason U.S. and U.K. prosecutors have put few bankers in jail for possible crimes related to the 2008 crisis could be attributed to a lack of political will as well as an inability to tie executives to middle management wrongdoing. In addition, incompetence is not illegal.
In contrast, other governments, such as Iceland and Spain, are actively investigating bankers for wrongdoing, and such nations as Brazil already have very strict laws that can hold bank executives, directors, and controlling shareholders personally liable even when no fault is proven. Breach of trust, or Untreue, allows prosecutors to charge bankers in a few European countries—Germany, Switzerland, and Austria—with a crime even if no actual criminal activities are proven.
The author concludes that planned criminal sanctions for reckless management, or making full personal liability for the losses of the bank, may have the effect of discouraging all risk taking, which would be an undesirable outcome.
Abstractor’s Viewpoint
The law should encourage bankers to have a strong sense of ethics, fiduciary duty, and diligence. But similar to other businesses, there is a risk of failure. Criminal sanctions for all bankers (i.e., blind justice) and putting directors in jail for bad business decisions may discourage them from taking any risk and ultimately hurt the whole financial system. Strict laws are designed to be an incentive for bankers to manage their institutions responsibly, but such laws cannot be treated as a substitute for control by regulators.