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Governance of Financial Institutions edited by Busch, Danny; Ferrarini, Guido; van Solinge, Gerard (31st January 2019)

Part III Ownership Structures, 14 State-Owned Financial Institutions

Johannes Adolff, Katja Langenbucher, Christina Skinner

From: Governance of Financial Institutions

Edited By: Danny Busch, Guido Ferrarini, Gerard van Solinge

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: null; date: 25 August 2019

Regulation of banks — Investment business

(p. 326) 14  State-Owned Financial Institutions

I.  Introduction

14.01  Following the global financial crisis of 2008, lawmakers worldwide adopted a sweeping set of regulatory reforms. For the most part, these reforms—and the debates that surround them—have addressed questions of regulatory and financial institution design. Less probed, however, have been questions of financial institution ownership. But as much the financial crisis prompted a re-examination of the ideal scope and boundary of the state’s intervention in financial markets, it should also, the authors of this chapter believe, provoke thought about whether the state—as opposed to private stakeholders—is better placed to act as the owners of financial institutions. This chapter considers whether state-ownership of financial institutions can (and should) further systemic stability and allocative efficiency, goals that can maximize the collective aggregate welfare.

14.02  In most Western developed and capitalist economies, the answer to that question is generally assumed to be ‘no’.1 State-owned financial institutions are not (or have not (p. 327) been for decades) common in these economies. The United States and Germany may, however, be seen as partial exceptions among their peer Western economies, with the United States’ Government-Sponsored Enterprises (GSEs) and Germany’s state-owned banks. Notably, theories in favour of state-ownership of financial institutions have gained traction among some academics and policymakers in both of these countries over the past several years.

14.03  In the United States, the state-ownership conversation has been framed largely in terms of public utility regulation. With financial regulators such as Vice President of the Federal Deposit Insurance Corporation (FDIC), Thomas Hoenig, and Minneapolis Federal Reserve Bank President, Neel Kashkari, suggesting that banks should be regulated as such.2 Legal scholars like Morgan Ricks,3 Mehrsa Baradaran,4 and Saule Omarova and Robert Hockett5 have each, as well, considered banks as providers of a public good, service, or utility—which institutions should in turn be regulated as such.

14.04  Likewise, in Germany, where almost half of banking activities are carried out by ‘alternative banks’ (savings banks mainly controlled by municipalities, Landesbanken mainly controlled by the savings banks and the federal states (Bundesländer), and cooperative banks mainly owned and controlled by their customers),6 there is a certain level of support for the notion that such ‘alternative’ ownership structures have their merits and that,7 therefore, a good mix of private and non-private ownership (p. 328) structures may well be the most promising approach for pursuing allocative efficiency and overall system stability.8 The mainstream view, however, remains skeptical, especially regarding allocative efficiency and the level of professional qualification and banking skills in the boards of public banks in Germany.9

14.05  This chapter engages with, and expands, this ongoing debate in financial regulation law and policy by revisiting the matter of state-ownership in a new and comparative light. Ultimately, this chapter does not espouse state-ownership of financial institutions; but it does: (i) explore some aspects of the various theories that could support (at least a portion) of the banking system coming, or as the case would be in Germany, remaining under public ownership, and on this basis: (ii) offer some tentative suggestions for accomplishing the myriad efficiency and/or social-policy goals that often motivate state-ownership governance structures.

II.  A Theoretical Case for State-Owned Institutions

14.06  In traditional law and economics thinking, the state is justified in intervening in financial markets (and, accordingly, in the business operations of financial institutions) in order to correct market failures. Commonly, these failures involve some inefficiency in the allocation of resources or the persistence of systemic risk.10 From that normative perspective, this section considers whether—conceivably—state-ownership of financial institutions serves those efficiency and stability ends better than private ownership can.

(p. 329) A.  Possible rationales

1.  The shareholder perspective

14.07  According to the traditional mainstream view in corporate finance law and economics,11 the bearers of the residual risk of a firm should exercise ultimate control, and the firm’s management should serve the long-term interests of these bearers of the residual risk. In a simplified model of a firm (ignoring hybrid and loss absorbing debt instruments), the bearers of the residual risk are the equity investors. In a publicly listed company, these are the shareholders, and they have the ability to mitigate the risk of their overall investment position by way of diversification in a portfolio.

14.08  If the shareholder base is highly dispersed, principal-agent problems arise as rational apathy induces shareholders to refrain from exercising control at an appropriate level of intensity. To the extent no mitigating mechanisms are in place, principal-agent problems result in agency costs. These costs of a failure to align interest between shareholders and management diminish cash flows to equity. On the macro-level, agency costs result in an overall misallocation of resources, especially as free cash flows are not being returned to the equity investors and thus prevented from being reinvested more productively elsewhere in the economy.

14.09  Mitigating mechanisms resulting in an alignment of interest between management and shareholders include: (i) performance-based remuneration (such as stock options); (ii) the market for control; (iii) activist shareholders; and (iv) information transparency vis à vis the capital markets. As a rule, the ability of these mechanisms to reduce agency cost is strongly correlated to the capital market’s allocative efficiency: if stock prices adequately reflect a listed company’s fundamentals, mitigants (i) to (iv) may be expected to reduce agency cost by effectively aligning the interests of shareholders and management. If not, they may even be counterproductive, the interdependencies between performance-based remuneration and the exploitation of short-term market inefficiency being an example.12

14.10  Against this theoretical backdrop, the model world to which the vast majority of lawmakers (legislatures and judges developing corporate and capital markets law) aspire in the UK/US context is focused on the base case of a listed stock corporation with a dispersed ownership base whose stock is traded and priced on a public (p. 330) market efficient enough to allow for mitigants (i) to (iv) reducing agency cost.13 When it comes to the part of the law that determines to whom management owes its duty of loyalty, the focus of this model is on shareholder value (the ‘Shareholder Value Model’).

14.11  Among the continental EU Member States, there is a fair number subscribing to a more open, somewhat softer approach, requiring management to serve the interest of other stakeholders, too (without perceiving this as a mere disguise for management pursuing its own self-interest at the cost of the shareholders and general allocative efficiency). Among such other stakeholders, which the law on the continent acknowledges as the bearers of interest which are to legitimately guide the conduct of management, are in particular debtholders, employees, customers, the local economy and sometimes even society at large (the ‘Stakeholder Value Model’).14

14.12  Even jurisdictions leaning to the Stakeholder Value Model—such as traditionally Germany—would, however, nowadays acknowledge the existence of the principal-agent problem, the need for mitigants capable of reducing agency cost, and the need for a shareholder-oriented corporate governance that ensured the effectiveness of such mitigants. Mitigants (i) to (iv) therefore play a central role in the corporate governance of banks under the Shareholder Value Model as well as under the Stakeholder Value Model: if banks are publicly listed and have a highly dispersed shareholder population, there is the problem of rational apathy, and thus there is a need for mechanism ensuring the alignment of interests between shareholders and management. Hence, performance-based remuneration, the market for control, activist shareholders, information transparency, etc. can help to mitigate principal agent problems between shareholders and management of banks.

(p. 331) 2.  The debtholder perspective

14.13  But, regarding banks, this is not the end of the story. Even from the perspective of a strict proponent of the Shareholder Value Model it appears necessary to take into account that, as the global financial crisis has painfully brought to mind, banks are special.15

14.14  To start with, banks are leveraged far more aggressively than firms of the real economy. The portion of the liabilities side of a bank’s balance sheet which is contributed by equity investors (‘shareholders’) and instruments with some loss absorbing capacity (‘hybrids’) is small when compared to the portion contributed by depositors, holders of bonds, and other debt instruments, and the bank’s counterparties under its liability-side derivatives, and so on (collectively the ‘debtholders’). In comparison to typical finance structure in the real industry, this gives the debtholders of banks a more prominent place among the constituencies providing funds to the firm. Their investment into the bank can be framed as creating a principal-agent relationship, too: from the perspective of the debtholders, the bank (as agent) acts in their interest in the process of advancing the funds provided by the debtholders (as principals) to the bank’s asset-side customers, such as retail borrowers, corporate borrowers, issuers of bonds, and stock purchased by the bank, counterparties under its asset-side derivatives, and so on (collectively the ‘borrowers’).

14.15  Arguably, this intermediation service rendered to the debtholders is the centerpiece of a bank’s function, and thus the main reason why banks exist at all: in addition to maturity transformation and risk diversification, a bank offers debtholders a way to efficiently deal with information asymmetries that would otherwise arise in their (then direct) relationship to the borrowers.16 From the perspective of a Debtholder (who is neither insured nor covered by an explicit or implicit state guarantee), the use of having a bank acting as the middlemen between the Debtholder and the borrower crucially depends on how well the bank acts as his agents when selecting the right borrowers, charging them interest at a level that is appropriate for the risk they represent, and keeping an eye on them until interest and principal are fully repaid. To the extent a Debtholder could lend, in a commercially sound manner, directly to a borrower, there would be no reason for letting the bank pocket the margin that would otherwise increase the interest that can be earned by the debtholders on their fixed income financial asset (or be split, in some manner, between the borrowers and the debtholders). Sophisticated debtholders can quite easily build portfolios of debt instruments to diversify their risk and satisfy their maturity preferences. What (p. 332) is not so easy to substitute if the bank falls away as the intermediary and what therefore constitutes the core element of a bank’s value creation for debtholders is the process of selecting, appraising, and monitoring borrowers (the ‘Credit Process’).

14.16  With regards to the Credit Process, the interest of the bank’s management and the debtholders are not automatically aligned. Rather, managers (including not only board members but also other risk-takers, especially those with access to the bonus pool) may, if left unchecked, create agency cost for the debtholders to the extent they take risks that benefit the managers, and possibly also the Shareholders, but which are of no interest, or even detrimental, from the perspective of any debtholders not covered by deposit insurance or explicit/implicit state guarantee. Such excessive risk-taking may consist of selecting borrowers with a poor credit risk, but also in engaging in risky asset-side activities outside the loan book, such as investing in sub-prime collateralized debt obligation (CDO), take ‘naked’ credit risk under a credit default swap (CDS), or proprietary trading in financial assets and derivatives.

14.17  For this reason, there need to be mitigants capable of reducing agency cost for the debtholders, that is, mechanisms aligning the interests of management with those of debtholders. The mitigants reducing the agency cost for shareholders (stock options, the market for control, activist shareholders, information transparency, etc.) will often not be of help17 to the debtholders who look at their fixed income future cash flow, do not participate in the residual profit, are exclusively interested in the bank’s capability to repay its debt when due, or as the case may be, on demand—and consequently have much lower risk appetite than the shareholders. Thus, the corporate governance of banks needs to reach beyond the traditional instruments developed to ensure an alignment of interests between shareholders and management. As Klaus Hopt put it, with banks, there needs to be ‘some sort of debt governance’ in addition to the traditionally more accentuated ‘equity governance’.18

3.  The state’s perspective

14.18  A second specialty of banks, closely related to their high leverage, is their fragility: typically, a large portion of the claims of the debtholders is payable on demand. Whilst the traditional textbook example for this is current account deposits, the practically much more important source of vulnerability for many modern-day banks is the possibility of derivative counterparties to terminate a derivatives master (p. 333) agreement, and close out all derivatives contracts entered thereunder, resulting in a net claim by one of the parties (which is, at this point in time, already collateralized by the asset posted under the term of the master agreement). Unlike firms of the real economy, banks fail in the instance that a critical portion of their debtholders lose faith in their sustainability and make use of their right to reclaim the funds extended to the bank. The (modern variety of the) bank run risk is the reason why banks cannot, at the brink of a crisis, sit down with their key debtholders and negotiate a settlement, such as a package of haircuts and debt-to-equity conversions, and thus avert insolvency in the manner that is customary in the real industry.

14.19  With regards to interconnected (often big) banks, the third specialty is their systemic relevance: if systemically relevant institutes fail, they must be expected to take a number of their peers with them, among which there may be further highly interconnected institutes, thus spreading the contamination to the point of systemic failure which the states have done so much to avert from 2008 to 2010. Potential contamination channels are numerous and complex, ranging from direct bank-to-bank exposure as the most direct one to the erosion of overall market confidence as the most indirect one. For the purposes of this chapter, it may suffice to say that systemically relevant banks have become a clearly defined class of credit institution under Basel standards as well as under EU regulatory law, especially when it comes to the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM), and a whole new body of law, with the Bank Recovery and Resolution Directive (BRRD) as its EU centrepiece, has sprung up to deal with the problem of needing to put the state in a place where it can, when a crisis occurs, prevent the collapse of systemically relevant institutes without using (too much) of the taxpayer’s money in doing so. Likewise, Title II of the Dodd-Frank Act gives US financial regulators the legal power to resolve failing institutions which are systemically important, which is known as the ‘Orderly Liquidation Authority’.

14.20  With banks, therefore, the state is in the picture regardless. As a result of leverage, fragility, and systemic relevance, the shareholders of big and/or interconnected banks are not alone as the bearers of the residual risk. Rather, to the extent (i) bank debt is explicitly insured by the state or (ii) implicitly guaranteed because a bailout would (predictably) be necessary to preserve systemic stability, such risk is being shared with them by the state and its taxpayers.

14.21  The key issue in this respect is the implicit state guarantee: There is little doubt that markets and rating agencies have long recognized the implicit state guarantee as an economic reality, resulting in a tangible funding advantage and in openly awarded rating upgrades, often by several notches, for ‘too-big-to-fail’ institutes.19 (p. 334) This pricing by the markets (correctly) reflects a massive externalization of risk from the banks’ management (and equity) to the state. Scholars and regulators also agree that moral hazard arises as a result of this externalization of risk, inducing managers to take more risk than they would if they (or equity) needed to fully bear the consequences of a realization of such risk.

14.22  Since the state, acting as the rule-setter and regulator, is hardly comparable to a private law owner, it would probably lead to more confusion than clarification if one attempted to frame the incentive structure resulting from the implicit state guarantee in terms of principal-agent theory.

14.23  That said, any theory of bank governance must take into consideration that, as a result of the implicit state guarantee, the state is exposed to the residual risk of the bank in much the same way as an equity investor. Any such theory must, in other words, make the state visible as the third large constituency invested in a bank: Even if the state holds none of such bank’s equity or debt instruments and receives no compensation for bearing residual risk, the state, by bearing it nonetheless, provides for a loss-absorption capability that is functionally equivalent to there being simply more equity. From the perspective of the debtholders, in particular, there is no difference between more loss absorbing equity being available (as a result of the bank having, e.g. issued more common stock) and an implicit state guarantee. Under the implicit guarantee, the state shoulders residual risk just like equity would. The state may not be the principal of banks (in which it holds no equity), but it is a bearer of risk of systemically significantly institutes, as long as it does not put on its hat as regulator and rule maker to do something to shift this part of the residual risk back to shareholders, hybrids, and debtholders. To the extent this does not happen, there is ‘Risk Bearing Cost’ weighing down on the state in a very similar manner as agency cost on the shareholders and debtholders.

4.  Triangular relationships around management

14.24  Thus, a triangular structure of relationships in which interests need to be aligned in order to avoid agency cost (with regards to shareholders and debtholders) and Risk Bearing Costs (with regards to the state) are being dealt with here. Simplified, this triangular relationship looks as follows (see Figure 14.01).

Figure 14.01  Bank Management

14.25  Within this triangular structure, the line of division that proved most problematic in the great financial crisis does not run—as the authors of this chapter would argue—between management and shareholders. They key challenge was, in other words, not related to the corporate governance issues which arise when dealing with the classic Berle/Means principal/agent problem which has, for decades, dominated the textbooks in corporate finance courses. Rather, the decisive line of division (p. 335) has run between an ‘equity camp’ comprising management and shareholders on the one side and a ‘systemic camp’ comprising debtholders and the state on the other: as long as all members of the ‘equity camp’ could jointly externalize risk, expected cash flows to equity could be generated by management taking risks that neither management nor shareholders needed to bear. Shareholders could hardly have been expected to reign in management in that respect. On the contrary, the risk externalization was factored into their expectation with regards to the cash flow to equity and thus increased the cost of capital for banks. Diminished risk appetite meant a competitive disadvantage on the market for equity investment and made a bank vulnerable on the market for corporate control. One had to dance to the music while it played.

14.26  Obviously, governance rules which aimed at paying better attention to shareholder value are not the right instruments for the purposes of scaling back on the externalization of risk from the banks to the state. Therefore, there need to be other instruments aiming at achieving this objective. Framed in the terminology introduced above, there needs to be other mitigants capable of reducing Risk Bearing Cost being incurred by the state (under the scope of the implicit state guarantee) and agency cost incurred by the debtholders (outside that scope).

(p. 336) 5.  State-ownership as an appropriate mitigant?

14.27  One such mitigant could be state-ownership of banks. On the face of it, this appears to be a highly effective approach to reduce the Risk Bearing Cost of the state. If the state fully owns a bank, the mismatch between the risk exposure of the state under the implicit state guarantee and the lack of control goes away. So does the externalization of risk. So does its flip-side, namely the subsidy to the bank resulting from the state bearing a risk without a share in the return.

14.28  Being invested as a loss absorber (under the implicit state guarantee) anyway, the state, when taking this approach, gets invested properly, takes the position of the sole shareholder, participates in the returns, and can effortlessly guide management towards its interests.

14.29  To the extent the state directly controls a bank as its sole shareholder, the need for Debtholder governance is also substantially reduced: the credit risk of the bank becomes de facto identical with the credit risk of the state (even de lege, if the state choses to make the implicit state guarantee explicit). Accordingly, funding cost will decrease, reflecting the lower risk for the debtholders. This will, as a valuable side effect, give the bank the leeway to generously fund enterprises in the real economy, and continue to do so in times of crisis, when the volume of commercial loans extended by private banks will likely contract. There is no question that such capability to avert a credit crunch lies at the heart of what the state would expect from its banking sector—and the absence of which hurts most at times of crisis. Thus, it seems ceteris paribus, state banks are better placed to avert a credit crunch. Because of their funding advantage, this holds true even if their Credit Process is run under purely commercial principles, without partial subsidies or development of the state objective being in the picture.

6.  Challenges of state-ownership of banks

14.30  Effective as the state-ownership approach may be, it comes at a high price. The crux is the process for decision making within the state when it comes to exercise its rights and powers as sole bank shareholder: as long as ‘the state’ is conceptualized as one single monolithic decision maker, taking ownership would surely fix the Credit Process. But, of course, it is not, and, as it is, state-ownership leads to interdependencies between the Credit Process and the political process. This entails inefficiencies and risks that, in the authors of this chapter’s view, tend to (almost) always outweigh the benefits.

14.31  More specifically, this chapter has, so far, neglected the multilayer principal-agent problems that exist within the institutions of the state. This is, obviously, a vast field of political science, in which the authors of this chapter, as lawyers, are no experts. That said, from a legal (and practical) perspective, the main challenge of state-ownership seems to centre around the Credit Process. In a state-owned bank (p. 337) it is up to the state to use its full control over management to prevent it from excessive risk taking. Typically, representatives of the executive branch—for example, of the finance ministry—are being tasked with monitoring the conduct of the state-owned bank’s management in general, and the allocation decisions under the Credit Process in particular.

14.32  Whilst effective state oversight may not be impossible, numerous problems of the incentive structure around such a monitoring role of the executive branch of government appear obvious: having ultimate control over the Credit Process and, at the same time, access to cheap funding back-stopped by the taxpayer, the federal, state, or local government can use the state bank to cause or encourage politically motivated allocation decisions as part of the Credit Process. If the executive branch makes use of this possibility and consequently state-owned banks grant loans for (partially) political reasons and accept more risk than is commercially sound, there is, outside the state itself, no one to stop them: since state-ownership, underpinned by an implicit, or as the case may be, even explicit state guarantee, unlocks access to cheap funding, it also removes any capability of the funding market to discipline management. Taking more risk will, in this institutional setup, not increase funding cost, as the debtholders will look at the state, rather than the individual state-owned bank, when assessing their credit risk. Equity markets, on the other hand, will not be capable of disciplining management, as state-owned banks do not depend on equity markets for their funding. Often, parliament will have no effective control either, as the funding and the allocation of resources via loans takes place outside the budgetary process (despite the budget being ultimately the need to provide the means if and when there is a crisis and the risk taken under the implicit state guarantee ultimately materializes).

14.33  Finally, even if one was to conceive a model world in which no political influence existed at all with respect to the decision making of management, the allocation of funds to borrowers under the Credit Process and the subsequent monitoring of such borrowers, the failure of the debt market would remain the central challenge. Even a shareholder-value oriented management that was guided by the purely commercial objective of optimizing the cash flow to equity (and was rewarded by its political owners solely on this basis) would be incentivized to take more risk, so as to generate better revenues, and would—this is the key issue—remain unchecked in doing so by market forces on either the equity market (doesn’t exist) or the debt market (doesn’t care to the extent there is a state guarantee).

14.34  The moral hazard that has been identified as one of the most important causes for the financial crisis would be made more substantial and more permanent. The state, one must conclude under this line of argument, is simply not equipped with decision-making processes that would be necessary to ensure, by way of appropriately monitoring and incentivizing management, a commercially efficient Credit (p. 338) Process. And an inefficient Credit Process will, at least in the long run, entail misallocation of resources on the micro- and macro-level, even if there is no additional element of politically motivated credit allocation under the ‘umbrella’ of an (implicit) state guarantee. This detrimental effect will be reinforced by the distortion of competition between state-owned and privately held banks that comes with the access to cheaper funds which the state-sheltered banks enjoy irrespective of the stand-alone risk bearing capability.

14.35  There are ways to improve the institutional design of responsible organs of the state, for example, by creating special monitoring bodies, by staffing them with well educated, well paid experts, by having the regulator oversee state-owned banks in the same manner as privately held ones, by requiring additional capital buffers which need to be taken from the budget and transferred to the state-owned bank in pre-crisis times already, by integrating parliamentary committees into the monitoring process, by granting the civil servants overseeing the state banks access to independent outside experts, and so on. But, as the authors of this chapter see it, the challenge remains to achieve, on the basis of such improvements of the internal decision-making processes of the state, a disciplining effect on management that would reach the level attainable when a privately held bank is exposed to a functioning equity market as well as a function debt market.

14.36  The state, in short, has not been designed to act as a good banker. It has been designed as a democratically legitimized intermediary between taxpayers and recipients of public funding; as such it stands no chance to perform equally well as an intermediary between debtholders and borrowers.

III.  State-Owned Institutions: The Practical Challenges

14.37  While the foregoing discussion presented an analysis of the theoretical benefits and challenges to state-ownership, this section endeavours to test the theoretical consideration, to the extent possible, against empirical evidence. For the United States, it suggests, through its set of comparative case studies, that state-ownership structures pose acute—perhaps insurmountable—obstacles to the efficient allocation of resources and systemic stability. For Germany, the picture is more nuanced, since in this country, a vast portion of the banking industry is in the hands of savings banks (mostly controlled by municipalities), Landesbanken (mostly controlled by the savings banks and the federal states/Bundesländer), national development banks (mostly owned and controlled by the Federal Republic of Germany), and cooperative banks (mostly owned by their customers). Many of these non-private sector banks have roots that go back to the nineteenth century, and have survived, quite well, and, arguably, on the whole no worse than their competitors in the private sector, the numerous crises since then, including the global financial crisis of 2008.

(p. 339) A.  The United States

14.38  At a glance, the United States would appear to disfavour state ownership of financial institutions. Even in the early days of the Republic, notions of state ownership in banking were unpopular. A First National Bank was chartered in 1791—for a twenty year period—but Congress did not renew the bank’s charter in 1811.20 The subsequent iteration—the Second National Bank—which was chartered in 1816, suffered a similar fate when its charter expired in 1836.21 (It was not until 1913 that the Federal Reserve System was created by the Federal Reserve Act).22

14.39  Since that time, financial regulation (albeit, not state ‘ownership’ per se) in the United States has generally followed what Professor John Coffee refers to as a ‘sine curve’—where periods of financial regulation tend to follow panics or crisis but, over time, that regulation is gradually rolled back in the name of freer and more competitive markets.23 So, for example, several key pieces of post-Depression era banking regulation—including those regarding entry restrictions into banking;24 controls on deposit rates;25 and prohibitions on banks combining with securities underwriting firms26—were eliminated in the 1980s and 1990s. Likewise, some pieces of the regulatory framework which were imposed after the 2007–2008 global financial crisis may also be pared down if certain legislative proposals—pending at the time this chapter was written—are passed by the US Congress, in whole or in part.27

(p. 340) 14.40  Notwithstanding what appears to be America’s historic reversion to the free-market mean, the United States does have some form of state-sponsorship (though not technical ownership) by virtue of its GSEs. Additionally, the United States also hosts a credit-export finance agency, the Export-Import Bank (‘Ex-Im’), which is a bona-fide state-owned financial institution. In principal, these institutions exist to serve a social goal: a manner of credit allocation that is perceived to be under-met by the private banking sector. In the case of the housing GSEs, colloquially known as Fannie Mae and Freddie Mac, this allocative deficiency relates to finance for housing among low- and middle-income borrowers; for the Ex-Im Bank, the allocative shortfall pertains to the exporters of American goods and services. Without debating the normative merits of those goals, what follows is a brief descriptive case study of why, in pursuing them, the state’s backing (either explicit or implicit) may create systemic risk or suboptimally allocate public resources.

1.  Government-sponsored enterprises

14.41  The story of the housing GSEs and the financial crisis is not a happy one. Some scholars and policymakers identify the GSEs as a significant source (or at least contributor) to the mortgage bubble (though this is a debated point). On that critical view of the GSEs’ role in the financial crisis, it was the very fact of the GSE’s implicit state-backing that incentivized them to oversupply subprime mortgages which, in turn, fueled a systemically damaging debt bubble.

14.42  The GSEs are privately held corporations that were created by the US Congress—Fannie Mae in 1938, and Freddie Mac in 1970. Specifically, these institutions were created ‘to improve the efficiency of capital markets’ and to overcome ‘statutory and other market imperfections which otherwise prevent funds from moving easily from suppliers of funds to areas of high loan demand.’28 For the housing GSEs in particular, this translates into a mandate to increase the supply of mortgage credit for low- and middle-income borrowers.29 Fannie and Freddie pursue that goal by buying qualifying loans from other lenders, which is intended to provide liquidity to the mortgage market; these GSEs either hold those credit assets on their balance (p. 341) sheet, as part of a portfolio business, or they securitize pools of mortgages into mortgaged-backed securities and provide guarantees on those MBS.30

14.43  Although the GSEs are technically privately owned, ‘[t]he law treats the GSEs as instrumentalities of the federal government, rather than as fully private entities’.31 The Congressional Budget Office sets out the myriad ways in which this is so: via their federal statute chartering; exemption from state and local taxes; exemption from SEC registration requirements and fees; and by virtue of their access to the Federal Reserve as a fiscal agent.32 Furthermore, GSE debt gets special treatment: federally chartered banks and thrifts can make unlimited investments in it; it can serve as collateral for public deposits, and the Fed can buy it in in open-market operations.33 And GSE securities are exempt from some state investor protection laws because they are classed as government securities under the Securities Exchange Act of 1934.34

14.44  Fannie and Freddie suffered during the crisis, as they had become highly exposed to mortgage risk. According to Laurie Goodman, the GSEs accounted for 27.4 per cent of the outstanding mortgage market in 1990; at the end of 2003, that figure had increased to 43.8 per cent.35 Importantly, beyond pure market share, the riskiness of the GSE’s 1.71 trillion (as of 2011) US dollar mortgage portfolio had increased over time. As Viral Acharya and his co-authors set out, in 2006 and 2007, the GSEs purchased 227 billion US dollars of subprime and Alt-A MBS (and perhaps an additional 500 billion US dollars of other kinds of high-risk mortgages.36 Meanwhile, to remain competitive with private label mortgage-backed securities, the GSEs had been loosening their underwriting standards since around 2003.37

14.45  As Michael Barr, Howell Jackson, and Margaret Tahyar surmise, these institutions experienced ‘colossal failures’ during the crisis.38 On 6 September 2008, the Federal (p. 342) Housing Finance Agency (the independent regulator created to oversee these GSEs) placed both Fannie and Freddie under federal conservatorship; the following day, the Treasury entered into a Senior Preferred Stock Purchase Agreement (PSPA) with both Fannie and Freddie to make investments of up to 100 billion US dollars in senior preferred stock, as needed in order to ensure the institutions had positive equity.39 In 2009, this commitment was increased to 200 billion US dollars (or 200 billion US dollars plus any cumulative net worth deficits between 2010–2012 that exceeded surplus at year-end 2012).40 As of March 2017, Fannie had received 116.1 billion US dollars under the PSPA and, as of December 2017, Freddie had received 71.3 billion US dollars.41

14.46  Several prominent experts of financial regulation consider the GSEs’ risk-management and related governance problems to have been a byproduct of these institutions’ implicit state-backing. For one, critics point out, the GSEs had a housing policy mandate with which they had to comply. Some argue that this policy mandate incentivized a supply of more than the socially optimal amount of subprime credit. One of the most vocal proponents of this view, Peter Wallison, wrote that ‘[t]hese policies … forced the loosening of traditional mortgage underwriting standards in order to make mortgage credit more available to low- income borrowers. However, the loosened standards spread to the wider market and helped to build a massive housing price bubble between 1997 and 2007.’42 Wallison points out that: ‘Almost two-thirds of all bad mortgages in our financial system … were bought by government agencies or required by government regulations.’43

14.47  There is another common and related view that the GSE state-backed-structure bred a type of moral hazard, born of the perception that the federal government would step in to rescue the GSEs should they become insolvent—which they ultimately did.44 Where both managers and stakeholders come to expect government (p. 343) support in a time of crisis, the incentives to act prudently—and properly oversee risk-taking—become diluted. Such critiques are not unique to government sponsorship, of course; they are also often made in connection with other forms of public backstops, such as the power of central banks to act as lender of last resort and deposit insurance. Arguably, however, this kind of moral hazard becomes more acute when the market assumes that the financial institution in question is (functionally) co-extensive with the government, because the actual limitations on government support may be assumed away.

14.48  And because the market assumed that the US government would be standing ready and willing to support the GSEs, those institutions were able to get funding at cheaper than normal market rates.45 This debt subsidy meant that the GSEs’ investment in mortgage-assets—their retained portfolios—was highly profitable; as Acharya and his co-authors dubbed it, the retained portfolio became the ‘cash cow’ of the GSEs.46 Arguably, the debt subsidy—which flowed from the GSEs’ de facto governmental status—would have incentivized the GSEs to create more than the systemically safe amount of mortgage credit.

14.49  Finally, given the close link between the GSEs and political elites, change to their business model—even where recognized as systemically dangerous—was difficult to achieve. After the crisis, Henry Paulson, former Treasury Secretary, remarked that ‘Fannie and Freddie were disasters waiting to happen’.47 However, Paulson noted, ‘The GSEs wielded incredible power on the Hill thanks in no small part to their long history of employing—and enriching—Washington insiders as they cycled in and out of government.’48

14.50  Though many may disagree with some of these commentators’ views on how (or if at all) the GSEs contributed to the housing bubble, it is difficult to deny that the implicit backing of the US government weakened the GSEs’ incentives to manage their mortgage risk-taking, which governance weaknesses ultimately served as the source of their fragility, conservatorship, and taxpayer bailout. Moreover, it is not at all clear that whatever social welfare gains their lending actions could have had—in pursuing their affordable housing mandate—were not then netted out by the consequences of the oversupply. Not only were numerous low- and middle-income borrowers foreclosed upon, but society more broadly also suffered from the mortgage bubble and ensuing recession as well. As Professor Acharya and his co-authors have written, in this GSE model, all gains are privatized, but the losses (p. 344) all socialized.49 Consequently, ‘[w]hen the credit risk that [the GSEs] took on materialized, the tax payer was stuck with a huge bill’.50

14.51  To be fair, the GSEs suffered many of the same governance failures as the private depository and investment banking institutions. And so it is difficult to know whether the implicit backing of the state (and their other state-like features) made the GSEs a larger contributor to systemic risk than these other financial institutions. That seems unlikely. Nevertheless, on a conceptual level, considering the problems that attend state-sponsorship should prompt further academic and policy thought as to whether the existing GSE structure in the United States is the ideal way to accomplish the social policy goal of affordable housing, given the systemic stability concerns that it presents.51 Perhaps not surprisingly, housing finance reform has been a major tenet of the post-crisis reform debate for the past ten years.52

2.  Export-import bank

14.52  While the Ex-IM Bank did not play a role in the financial crisis (and it is difficult to see any connection to systemic risk), a study of that institution does illustrate other governance-related problems that can result from state-ownership of a financial institution. As such, the US experience with the Ex-Im Bank may give one even further pause regarding the desirability of state-ownership as a means of achieving a particular type of credit allocation.

14.53  The Ex-Im Bank is an export credit agency that is entirely owned by the US federal government.53 The Bank was created in 1934, as part of the New Deal package of reforms that responded to the Great Depression.54 It thus operates pursuant to a general statutory charter—in the Export-Import Bank Act of 1945, as amended—which is periodically renewed.55 Congress has established a set of mandates (relating (p. 345) to the provision of competitive financing for US exports)56 for the Ex-Im Bank, though it does not approve individual transactions.57 Its mission, in brief, is to support US employment by facilitating the sale of goods and services abroad by providing various forms of ‘export finance’.58

14.54  Export finance generally refers to funding used to cover the period between a foreign buyer ordering the goods or services from a US supplier, and the time in which payment is made from the foreign buyer to the US supplier.59 Exporting businesses can require export financing for a number of different reasons: among others, to protect against the risk that the foreign buyer will default; because exports require more working capital than the supplier has on-hand; or because of the long delay (on average, five months) between shipment and payment.60 Accordingly, the Ex-Im Bank can provide qualifying exporters and qualifying transactions with a range of financial products, including direct loans, loan-guarantees to commercial banks that lend to the foreign buyers of the US exporter, working capital finance, or export credit insurance to the exporters and their lenders to protect against cases of non-repayment.61

14.55  As with the GSEs, commentators have long debated whether it is appropriate for the US government to intervene in financial markets via the Ex-Im Bank to further the policy goal of export promotion. The Bank’s proponents mainly point out that the institution is necessary to fill gaps in private-sector financing of certain large, capital-intensive projects (like infrastructure, nuclear power plants, or aeroplanes)62 and, relatedly, the need to place American exporters on an equal footing with foreign companies that are backed by their own governments and respective export-credit agencies.63

14.56  The criticisms of the Ex-Im Bank are numerous. From an efficiency standpoint, some argue that the Bank wastes taxpayers’ money and inefficiently allocates (p. 346) resources by subsidizing certain companies. In the extreme, the system has been referred to as one of ‘corporate welfare’.64

14.57  As one detractor points out, the Congressional Budget Office might report a billion US dollar loss between 2015 and 2024 if the Ex-Im Bank is held to the same fair-value accounting standards as private businesses.65 Separately, though related, other commentators dislike the Bank for its subsidization of certain ‘national champions’.66 But the most trenchant and substantive critiques are grounded in governance. For one, because the very existence of the Bank is a politically charged question, it suffers from political–economy drags on its operations. As of the writing of this chapter, the Bank lacks a quorum because certain members of Congress have blocked the President’s nominees to the board. Without the three-person quorum, the Bank is unable to approve any financing deal over ten million US dollars.67

14.58  The Ex-Im Bank has also suffered from lapses in conduct in the past several years, prompting one commentator to refer to it as ‘an entity that’s become synonymous with corruption and fraud’.68 The issue was discussed during a 2015 Congressional hearing that was held in connection with the Bank’s reauthorization. There, the Deputy Inspector General, Michael T. McCarthy, aired some of the Bank’s internal control failings. As he stated:

[o]ne of the consistent observations arising out of audits, evaluations, and investigations conducted by the OIG are weaknesses in governance and internal controls for business operations. We have reported that internal policies providing clear guidance to staff and establishing clear roles and authorities have not been prevalent at Ex-Im Bank.69

Further, McCarthy testified:

An FY 2013 audit of direct loans found that loan officers did not always document sufficient evidence of the borrower’s need for Ex-Im Bank financing, ensure or (p. 347) document borrower eligibility and compliance with Ex-Im Bank credit policies and standards, and document that comprehensive due diligence reviews were completed prior to loan approval. These conditions occurred, in part, as a result of inadequate recordkeeping and reliance on institutional knowledge.70

14.59  Consider one former loan officer who pled guilty in federal court in 2015 for accepting over 78,000 US dollars in bribes in exchange for recommending the approval of unqualified loan applications.71 In one instance, his behaviour caused the bank to lose almost 20 million US dollars.72 An opinion in the Wall Street Journal remarked, ‘It’s hard to defend the Ex-Im Bank as it faces roughly 800 fraud claims and nearly 90 criminal indictments as of 2015.’73

14.60  Looking at the Ex-Im Bank, it is yet again difficult to conclude that state-ownership maximizes the aggregate collective welfare. Although the Bank’s overarching mission is to support US employment, it is unclear whether a state-owned institution accomplishes that goal in the optimal way. As others have also pointed out, in the absence of Ex-Im financing, economic theory might predict that jobs would be created in other sectors of the economy, even as some dissipate in the export industry—with no net loss in employment over the long term, and with fewer dredges on public resources and fewer anticompetitive credit allocations (and their foreign policy implications).74

B.  Germany

1.  The three pillars of the German banking system

14.61  The German system of financial intermediation is bank-based in the sense that many debtholder–borrower relationships that are directly established in the market for corporate bonds and commercial paper in the US/UK markets, have the bank as the middleman in Germany, resulting in much larger corporate loan books of the German commercial banks. For this reason, the banking sector in Germany is quite large. It comprises three ‘sectors’ (Sektoren) that constitute the German three-pillar banking system. Privately held commercial banks constitute the first pillar. The second pillar comprises the savings banks (Sparkassen, mostly controlled by the municipalities) and Landesbanken (mostly controlled by the savings banks and the federal states, Bundesländer). Cooperative Banks, which have emerged from (p. 348) self-held initiatives in the nineteenth century, and which are owned and controlled by their own customer base, constitute the third pillar.

2.  First pillar: commercial credit and private banks

14.62  Within the first pillar, the private credit banks can be divided into two sub-groups consisting of the large universal banks and the smaller commercial banks. Large banks such as Deutsche Bank AG, Commerzbank AG, and HypoVereinsbank AG (now belonging to UniCredit) are legally formed as stock companies, whereas smaller commercial banks may be organized in other legal forms, for example a German limited liability company. Historically, these privately held banks were fairly focused on retail or corporate banking with a close client relationship. In the world of corporate lending, in particular, the famous German-style Hausbank-relationship focused on personal acquaintances on the management level, long-term thinking, loyalty, and mutual trust. Today, the large banks, in particular, have expanded and offer the entire spectrum of retail, commercial, capital markets, real estate, investment banking, and product creation the global competitors are offering, and the Hausbank-concept has almost entirely been replaced by open, and often fierce, competition among German and international banks on the market for corporate and commercial lending. Throughout their history, determining the corporate purpose of the banks in the German private sector was fairly straightforward: their business objective has always been to maximize profits for their owners (shareholders), with some fluctuation of the consideration given to what would today be called corporate social responsibilities (strong after World War II, then much weaker in the 1980s and 1990s, now coming back, arguably as a long-term effect of the crisis on the overall legislative climate on the European Union and national level).

3.  Second pillar: savings banks and Landesbanken

14.63  Banks in the second pillar have no private equity investors. They fall into two sub-categories:

  • •  Savings Banks (Sparkassen) are primarily established by the municipalities. Typically, their regional scope of business is restricted to their municipal borders. As public agencies, savings banks used to enjoy the protection of an explicit state guarantee (Gewährträgerhaftung), which was abolished as a result of having been found to constitute an illegal state-aid (subsidy) under EU law in 2005. Today, there is still the protection by a solidarity regime (Sicherungsreserve) under which all German Savings Banks (and the Landesbanken) have made a rather strong mutual commitment to support each other in the event of a crisis or failure of any individual member. This system of mutual support is considered (by the EU regulator) to be as robust as to allow for a zero risk-weight (p. 349) on all receivables and claims among the members of the Sparkassen-Sector, as the solidarity system is called. The statutory purpose of the savings banks is not (exclusively) profit generation. Rather, it is to provide and safeguard savings, credits, and banking services for local citizens, and promote local economic growth to support public welfare and to fund for local and cultural events, initiatives, or projects.

  • •  Landesbanken such as Landesbank Baden-Württemberg (LBBW), Norddeutsche Landesbank-Girozentrale (Nord/LB), etc are held and controlled by the federal states, often together with the confederation of the Savings Banks of that particular federal state (Sparkassenverband). Their original business purpose has been to provide assistance, banking expertise, and financial support for all banking transactions and services the local savings banks are not handling, and to operate on a higher financial level with and in the interests of their related federal states. Some of them—for example the now liquidated WestLB—have, from this basis, ventured into competition with global universal banks, expanding to activities like derivatives trading and investment banking.

Savings Banks and Landesbanken do not, as a rule, compete with one another, but they do compete, in some fields very successfully, with banks from the other two pillars, namely the privately held banks and the cooperative banks.

4.  Third pillar: cooperative bank

14.64  The third pillar comprises local or regional cooperative banks. Their basic institutional design dates back to the nineteenth century, when they sprung up as self-help initiatives for groups of the population who were not granted loans by the then existing private banking sector, such as workers, farmers, or small shop owners. Their equity holders are cooperative members, which mean they are not state-owned, but privately held. However, these members come, in principle, form the customer base of the bank, their equity stakes are not transferable outside this class of members, and one stake affords one vote, irrespective of its size. Thus, there is no public trading, let alone a market for corporate control for cooperative banks. Maximizing profit is not their corporate purpose. Rather, their historically determined key objective is to preserve financial independence of their members, as well as to maintain their access to credit, to strengthen their competitiveness, and to contribute to local or regional community development. Like the second pillar banks, they have a system of mutual solidarity and support, and have, especially through a number of central institutes operating on the federal level, expanded into more sophisticated banking activities, partially on an international scale. Similar to the second pillar banks, the credit cooperatives do not compete between one another and remain in their regional market without expanding. However, they compete with the universal banks of the two other pillars for market shares.

(p. 350) 5.  Market Shares

14.65  The ‘alternative banks’ (savings banks, Landesbanken, and co-operative banks) have a considerable market share in Germany, as is evident from the right hand side of Figure 14.02.

Figure 14.02  Market shares by business volume* as at 31 December 2016

Source: Financial Report 2016 of the Savings Bank Finance Group, 33 *Excluding derivative financial instruments of trading portfolio

14.66  If one looks at corporate loan books (loans to enterprises) they even dominate the market (see Figure 14.03).

Figure 14.03  Market shares in loans to enterprises* as at 31 December 2016

Note: *Loans to enterprises and self-employed persons (including commercial housing loans)

Source: Financial Report 2016 of the Savings Bank Finance Group, 34

6.  Development banks, especially KfW

14.67  Outside the tree pillars, there is a number of development banks (Förderbanken). Typically, these are fully state-owned and openly pursue the objective of supporting certain development objectives in the interest of the general public, such as infrastructure, or innovation. The most prominent German development bank is the state-owned credit institution for reconstruction (Kreditanstalt für Wiederaufbau, KfW), a special purpose bank in the legal form of a public agency of the Federal Republic of Germany and the federal states (Bundesländer). KfW was formed in 1948 as the agency responsible for the execution of the Marshall-Plan tasked with (p. 351) financing and facilitating the post-war reconstruction work and related projects. Today, its statutory mission has been adjusted to present purposes which are stipulated in Section 2 § 1 KfWG. Namely, KfW’s objectives are to execute government orders concerning financial state funding initiatives or subsidy programs, to grant loans to public regional authorities or administration unions, to fund social or educational programs, and to bankroll other projects for the benefit of the German or European economy. KfW is the third biggest German bank.

7.  Overall assessment

14.68  The difference between the US and Germany are glaringly obvious: the non-private ‘alternative’ bank sector in Germany is very sizable and has been stable for more than a century.

Allocative efficiency

14.69  On the plus side, when it comes to the quality of their Credit Process, the explicit local focus of these ‘alternative banks’ often gives them a competitive advantage in dealing with the large number of Mittelstand-small and medium-sized enterprises (SMEs) that form such a central part of the German economic and social model. (p. 352) They do not have profit maximization as their explicit corporate objective, but need to generate profit nonetheless, especially since, having no access to external equity investors, they need to build regulatory capital base from retained earnings. The monitoring problem referred to above, they have, at least partially, solved by having formed highly professional, central monitoring entities within their respective systems of mutual solidarity. However, the question remains whether such monitoring is capable of fully compensating the incentive problems created by taking away market discipline from the debt side (where the state guarantee diminishes competitive pressure) as well as from the equity side (where there is no access to the market for a state bank).75 Thus, it comes as no surprise that the German Council of Economic Experts has found that the savings banks and cooperative banks lend to significantly more productive corporate borrowers than private banks.76

14.70  On the minus side, their access to certain skillsets associated with international capital markets, structured products, complex derivatives, and investment banking activities is somewhat limited, due, in particular, to their organizational framework and the limitation of their remuneration systems. In many instances in which they ventured—especially on the level of the Landesbanken77—beyond their primary task of supporting the focused business of the regional members of the respective solidarity network—sizable losses have been incurred, and had to be either covered by the Länder or the Federal Republic, or, as in the case of WestLB, has resulted in the resolution of the affected banks.

Systemic stability

14.71  The case can be made that the diversity of models and ownership structures, such as within the three-pillar German system, tends, on balance, to increase overall systemic stability, since ‘diversity strengthens the resilience of the banking system as it mitigates vulnerability to systemic interconnections and promotes effective competition’.78 In the authors’ of this chapter’s view, there is merit to this case, as long as these banks stay focused on the core banking model of taking deposits to fund a loan book, and are therefore less exposed to spillover risk from investment banking activities. That said, in the global financial crisis, strong and weak banks (p. 353) seem to have been quite evenly distributed between private and state-owned banks in Germany. Of the two very large affected banks, one (Hypo Real Estate) was a publicly listed private bank, and the other one, WestLB, was a Landesbank. The regional savings banks and cooperative banks, were, arguably, less affected by credit contraction on the asset side, thus contributing to the overall absence of a credit crunch in Germany after 2008, especially when it came to financing SMEs of the Mittelstand.79 With regards to the next financial crisis, the focus on traditional core banking activities may, however, work to the disadvantage of the ‘alternative banks’: being less well hedged against interest rate change and having no other significant sources of profit generation, a departure from the super-low-interest-rate policy of the European Central Bank (ECB), the Bank of England, and the Federal Reserve Bank would hit them harder than the more diversified private sector banks.80


14.72  KfW, finally, is generally perceived as an overall success story. This is a view to which this chapter subscribes: if the state has resolved to give development subsidies in the first place—for example, for a certain class of infrastructure project—and this is compatible with EU Member State aid law, a good method for the implementation of such a subsidy (and the subsequent monitoring of its use) seems to involve an institution like KfW, which goes through the well-established steps of the commercially driven Credit Process, thereby clearly separating what portion of the overall package is, economically, a subsidy, and what portion is not.

IV.  Alternative Legal Paths to the Same Policy Goals?

14.73  In this final part, the question of whether there are alternative paths to achieving the same—or substantially similar—policy goals that motivate state-ownership of financial institutions is turned to.

A.  The German perspective

14.74  There is a need to differentiate with regards to Germany and the European Union. In the light of the overall assessment set out above, the German authors of this (p. 354) chapter would not support a notion to abruptly abolish the traditional three-pillar system. They think that, within limits, it has its merits, especially with regards to the quality of the Credit Process when it comes to lifting the value of strong regional relationships and knowledge. On the other hand, the authors would not wish to promote the expansion of the market share of savings banks, Landesbanken, and Cooperative Banks beyond the boundaries of its traditional focus on regional banking (and the central support for the resulting network of regional banks).

14.75  Thus, with respect to the first pillar—the presently private banks, among which there are a number of systemically relevant institutes—the problems created by the implicit state guarantee are still ongoing. If nationalization (state-ownership of formerly private banks) is not the solution to this problem, another solution is called for. Possible theoretical approaches are presenting themselves and being actually put into practice.

14.76  Firstly, the state can exercise more control over the banks for which it bears residual risk, for example, by regulating them more strictly, requiring them to hold more regulatory capital, sending state representatives to their board meetings, etc. Such increased regulatory supervision and increased requirements for systemically relevant banks have been introduced in the European Union, especially under the SSM already mentioned above: the SSM-regime identifies systemically relevant banks under a number of criteria (chief among which is total assets), puts them under direct ECB supervision, and requires additional capital buffers. Likewise, the Financial Stability Board (FSB) individually identifies globally systemically relevant intuitions.

14.77  Secondly, the mismatch between the state bearing substantial residual risk and having (too) little control can be reduced by bearing less residual risk. In the European Union, this was achieved mainly by introducing the BRRD bail-in instruments in order to shift (a portion of) the risk born by the state under the implicit state guarantee back to, in this order, shareholders; hybrids; and debtholders. Under this—very finely facetted—set of instruments the state can, by way of a decision of a special EU administrative body, the Single Resolution Board (SRB), assisted by the EU Commission, the ECB, and the Member States, re-capitalize a bank by a combination of wiping out shareholders and hybrids, and subjecting a portion of the debtholders to a reduction of the debt instruments (haircut) and also to conversion of a part of their claim against the failing bank into shares (debt-to-equity-swap), all of which happens by virtue of an administrative order, that is, without the need for individual consent of any member of these investor groups.

14.78  The losses absorbed by shareholders, hybrids, and debtholders in this manner do not need to be covered by the state any more. Because all market participants know this, ‘too-big-to-fail’ does not, any more, mean, ‘too-big-for-a-Debtholder-to-lose-his-money’. In theory, this puts an end to the implicit state guarantee. As (p. 355) the haircuts and debt-to-equity swaps under the BRRD can be effected unilaterally by the state (and literally overnight), the fragility problem is, so the theory runs,81 overcome, and the taxpayer does not, anymore, need to pour billions into failing banks to prevent systemic meltdown at a time of crisis. This, in turn, puts an end to market failure on the debt market for banks (which has previously been a consequence of the implicit state guarantee): if bail-in makes it possible for (unsecured and uninsured) debtholders to lose their money, debtholders have a reason to care about the risk bearing capacity of the banks they invest in. Thus, management will be rewarded for taking less risk by getting access to cheaper debt funding. Market discipline restored, one can expect a higher level of efficiency of the Credit Process.

14.79  These new instruments come with incentive problems, too. For example, when a public body—like the SRB—is ordering a bail-in, there is a strong incentive to ‘better err on the side of caution’ and rather cut too deep into the positions of the debtholders, thus over-capitalizing the very bank that has just been on the brink of failure. As the BRRD leave some room for discretion in the selection of the debtholders subjected to bail-in (especially for the reason of preserving systemic stability), there is also a risk of politically motivated selective decisions. Still, this approach of escaping the trap of the implicit state guarantee by bringing market discipline back to the banks—rather than taking them off-market completely—appears, to the authors of this chapter, as the overall more promising option.

B.  The US perspective

1.  Performance-based standards

14.80  In the United States, where the state intervenes in an otherwise private banking industry with a more (limited) ‘needlepoint’ style of ownership, one possibility, explored in other regulatory settings, is to set performance-based standards for private institutions. Performance-based standards generally refer to legal obligations to achieve a set outcome (i.e. a policy goal), but do not prescribe the manner in which regulated firms must achieve it.82 Emissions standards are often cited as a quintessential example. Pursuant to this regulatory model, financial regulators might set policy goals regarding affordable housing or export-finance for private firms, in a world where GSEs and the Ex-Im Bank played a lesser (or no) role.

(p. 356) 14.81  To be fair, this kind of model already more or less exists in the housing finance area with the Community Reinvestment Act (CRA),83 which requires that FDIC-insured deposit-taking institutions demonstrate to their supervisors that they are working to meet the finance needs of the communities in which they are chartered. Bank supervisors examine banking institutions for compliance with the CRA, and may consider the institution’s record in this regard when considering its application for a deposit facility.84 Granted, the CRA may not be a perfect instantiation of the performance-based model—some refer to the Act’s requirements as a contributing factor in the subprime bubble (i.e. by incentivizing too much subprime lending).85

14.82  Nevertheless, it may be a fruitful area of future research to consider how the CRA as legislation could be improved upon, and expanded, if the role of the GSEs were dialed back. And certainly there is room to adapt a similar performance-based legislative standard to achieve the distinct social policy goal of supporting American exports abroad. Ultimately, of course, whether to pursue a performance-based model at all, in lieu of the state-sponsored/owned institutions, will turn on a broader policy decision about whether the state should be responsible for correcting these perceived deficiencies in the way that the market naturally allocates credit.

2.  Flexible mandates to ‘have regard’

14.83  There are even softer forms of state intervention which steer—but not direct—financial institutions towards a desired social outcome. In particular, legislation can impose requirements on a regulator to consider—or ‘have regard’ to—certain factors while making a decision or taking an action. These kinds of requirements stipulate part of the decision-making process, but leave discretion with the regulator as to the ultimate decision taken.

14.84  Consider, for example, the Financial Policy Committee in the United Kingdom, a body that exercises its functions with a view to furthering the Bank of England’s financial stability objective and, subject to that, the government’s economic policy.86 The Bank of England Act—which empowers the Financial Policy Committee (FPC)—states that HM Treasury may make recommendations to the FPC about any matters which the FPC should ‘regard as relevant’ in interpreting the Bank’s financial stability mandate.87 Section 9F of that Act requires that the FPC ‘have (p. 357) regard’ to the Bank’s financial stability strategy when exercising its functions.88 In effect, using statutory requirements to ‘have regard’ to a particular objective requires a regulatory body to consider certain factors in its process, but does not legally mandate any particular substantive outcome.

14.85  In the US context, this could translate into, for instance, a power given to the Treasury to direct the Fed—the supervisor for systemically important financial institutions—to have regard to the way in which a relevant subsidiary of a bank holding company extends housing finance to low- or mid-income households, or the extent to which it provides export financing, (alongside an examination of the soundness of that lending) as part of the Fed’s supervisory examinations. Statutory have regards could, in that way, offer one method for operationalizing a weaker version of the performance-based standards model discussed above.


1  For a pre-crisis view, see Rafael La Porta, Florencio Lopez-De-Silanes, and Andrei Shleifer, ‘Government Ownership of Banks’, The Journal of Finance (2002), 57, 265 et seq, available at https://dash.harvard.edu/bitstream/handle/1/30747188/w7620.pdf?sequence=1, accessed 5 October 2018 (offering evidence to the effect that state banks are less capable of efficient allocation of financial resources and for a negative correlation between the market share of state banks in the banking sector and overall economic growth of a country), and for a post-crisis view see W di Mauro and R Haselmann, ‘Die Rolle der öffentlichen Hand im deutschen Bankensektor’, in K Hopt and G Wohlmannstetter (eds), Handbuch Corporate Governance von Banken, 2011, 270 et seq (offering an overview of the more recent economic literature, which also reflects much scepticism of state banks, especially with respect to the allocative efficiency of their credit decision).

2  Joe Rauch, ‘Big Banks are Government Backed: Fed’s Hoenig’, Reuters, 12 April 2011, available at https://www.reuters.com/article/us-fed-hoenig/big-banks-are-government-backed-feds-hoenig-idUSTRE73B3S820110412, accessed 5 October 2018; Mark Olson, ‘Why Banks Should Never Become Utilities’, American Banker, 7 March 2016, https://www.americanbanker.com/opinion/why-banks-should-never-become-utilities, accessed 5 October 2018; see also Stephanie Kelton and Paul McCulley, ‘The Fed Chair Should Be a Principled Populist’, New York Times, 30 October 2017 (quoting banking expert Paul McCulley as remarking, ‘[b]anks are many things, but at their core, they have a public utility function’).

3  Morgan Ricks, ‘Money as Infrastructure’, unpublished manuscript, November 2017, available at https://ssrn.com/abstract=3070270, accessed 5 October 2018.

4  Mehrsa Baradaran, ‘Banking and the Social Contract’, Notre Dame Law Review (2014), 89, 1283.

5  Robert C Hockett & Saule T Omarova, ‘The Finance Franchise’, Cornell Law Review (2017), 102, 1143.

6  See Section II.B.1 for a description of the ‘three pillar’ structure of the German banking industry.

7  P Behr and R H Schmidt, ‘The German Banking System: Charkteristics and Challenges’, SAFE White Paper Series No 23/2015, available at http://safe-frankfurt.de/fileadmin/user_upload/editor_common/Policy_Center/Behr_Schmidt_German_Banking_System.pdf, accessed 5 October 2018; K Mettenheimer and O Butzbach, ‘Alternative Banking and Recovery from Crisis’, Progressive Economy Forum, 2014, available at http://www.progressiveeconomy.eu/sites/default/files/papers/Kurt%20Von%20Mettenheim%20Alternative%20Banking%20and%20Recovery%20from%20Crisis.pdf, accessed 5 October 2018.

8  R Ayadi et al, ‘Investigating Diversity in the Banking Sector in Europe’, Center for European Policy Studies, 2010, with an introduction by G Ferrarini speaking about the ‘biodiversity of banking’, available at http://aei.pitt.edu/32647/1/70._Investigating_Diversity_in_the_Banking_Sector_in_Europe.pdf, accessed 5 October 2018. The Final Report of High-level Expert Group on reforming the structure of the EU banking sector of 2 October 2012 (‘Liikanen Report’) devotes an entire chapter to ‘Diversity of Bank Business Models in Europe’, arriving at an overall positive assessment, 32 et seq.

9  H Hau and M Thum, Subprime crisis and board (in-) competence: private versus public banks in Germany, Economic Policy (2009), 24 60, 701–52, available at https://doi.org/10.1111/j.1468-0327.2009.00232.x; and K Hopt, ‘Corporate Governance of Banks after the Financial Crisis’, in E Wymeersch, K Hopt, and G Ferrarini (eds), Financial Regulation and Supervision—A post-crisis Analysis, 2012, para 11.18. For a balanced summary from the economist’s perspective, see di Mauro and Haselmann, n 1, 226, 227 et seq; see also German Council of Economic Experts (Sachverständigenrat), ‘Das deutsche Finanzsystem – Effizienz steigern, Stabiltät erhöhen’, 2008, paras 140, and 245 et seq (https://www.sachverstaendigenrat-wirtschaft.de/fileadmin/dateiablage/Expertisen/Das_deutsche_Finanzsystem.pdf, accessed 5 October 2018) in which the council is very critical of the large state-owned Landesbanken, but less so of the municipal savings banks.

10  See John Armour et al, Principles of Financial Regulation, Oxford 2016.

11  See M Jensen and W Meckling, ‘Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure,’ Journal of Financial Economics (1976), 3, 305–60; A Shleifer and R W Vishny, ‘A Survey of Corporate Governance, Journal of Finance (1997) 52, 737.

12  M C Jensen and Kevin J Murphy, ‘Performance Pay and Top-Management Incentives’, Journal of Political Economy (1990), 98, 98, 225–64; L A Bebchuk and J Fried, Pay without Performance: The Unfulfilled Promise of Executive Compensation, Harvard University Press, 2004.

13  From a bank-centric perspective of agency theory, see L Laeven and R Levine, ‘Bank Governance, Reglation and Risk Taking’, NRER Working Paper (2008), available at http://www.nber.org/papers/w14113.pdf, 5, accessed 5 October 2018, taking (and underpinned by empirical evidence) the view that the concentration of ownership in the hands of few owner with ‘great cash-flow rights’ will tend to increase risk for the bank.

14  Interestingly, the Basel Committee on Banking Supervision (BCBS) explicitly subscribes to the Stakeholder Value Model (with regards to banks), see BCBS’s Guidelines ‘Corporate Governance Principles for Banks’, 2015, 3 where it says: ‘The primary objective of corporate governance should be safeguarding stakeholders’ interest in conformity with public interest on a sustainable basis. Among stakeholders, particularly with respect to retail banks, shareholders’ interest would be secondary to depositors’ interest’. Similarly open to the notion of embracing, for banks in particular and due to systemic risk, a more stakeholder oriented model under corporate (and not only regulatory) law, see J Armour and J Gordon, ‘Systemic Harms and Shareholder Value’, Journal of Legal Analysis (2014), 6, 15, arguing in favour of a fiduciary duty of management towards debtholders. Critical of the BCBS’s stance and of Armour/Gordon in this respect is, G Ferrarini’s, ‘Understanding the Role of Corporate Governance in Financial Institutions: A Research Agenda’, ECGI Working Paper No 347/2017, 21, arguing that the task of protecting the interest of debtholders should be exclusively allocated to external regulation and interference of the regulator, not internal corporate governance.

15  For a current overview, see Ferrarini, n 14, 5 et seq.

16  For a good summary of economists’ views regarding this intersection of the general theory of the bank, agency theory, and the theory of asymmetrical information, see Mettenheimer and Butzbach, n 7, 21.

17  See Armour and Gordon, n 14, 39, who make the—extremely interesting—point, that a highly diversified model-shareholder (i.e. the equity-investor who is, at all times, holding the market portfolio which modern finance industry—and thus mainstream agency theory—conceptualizes as its model shareholder) will suffer from the failure of a systemic bank due to losses ‘produced throughout the diversified portfolio’, so that the excessive risk-taking by management is long term detrimental to both, (model-)shareholders and (model-)debtholders.

18  Hopt, n 9, para 11.29.

19  For a detailed survey of the available data and post-crisis economic analysis, see the 2014 Global Financial Stability Report, http://www.imf.org/en/Publications/GFSR/Issues/2016/12/31/Moving-from-Liquidity-to-Growth-Driven-Markets, accessed 7 October 2018, 101–32.

20  Federal Reserve Bank of Philadelphia, 2009 Annual Report, ‘The First and Second Banks of the United States: The Historical Basis for a Decentralized Fed’, available at https://www.philadelphiafed.org/publications/annual-report/2009/first-and-second-banks, accessed 5 October 2018; Gerard Caprio, ‘The Future of State-Owned Financial Institutions’, Brookings, 1 September 2004, available at https://www.brookings.edu/research/the-future-of-state-owned-financial-institutions/, accessed 5 October 2018; Federal Reserve Bank of Philadelphia, above; see also MuCulloch v Maryland 17 US 316 (1819) (challenging Congress’s authority to establish a Bank of the United States).

21  President Jackson vetoed the re-authorization of the Bank, and Congress did not override that veto. Federal Reserve Bank of Philadelphia, n 20.

22  For a general history of the Federal Reserve, see Peter Conti-Brown, The Power and Independence of the Federal Reserve, Princeton University Press, 2015.

23  John C Coffee, Jr, ‘The Political Economy of Dodd-Frank: Why Financial Reform Tends to Be Frustrated and Systemic Risk Perpetuated’, Cornell Law Review (2012), 97, 1019, 1059.

24  Office of the Comptroller of the Currency, Clarification and Revision of Charter Policy (final rule), 45 Fed Reg 68603, 68604 (15 October 1980).

25  Depository Institutions Deregulation and Monetary control Act of 1980 (DIDMCA), P L 96-221, 94 Stat 132.

26  See Gramm-Leach-Bliley Act, P L 106-102, 113 Stat 1338 (1999) (codified as amended in scattered sections of 12 and 15 USC (2006)).

At the time, then-Treasury Secretary Larry Summers referred to the repeal legislation as a system better suited ‘for the 21st century’ which would ‘better enable American companies to compete in the new economy’. Cyrus Sanati, ‘10 Years Later, Looking at Repeal of Glass-Steagall’, New York Times (12 November 2009), available at https://dealbook.nytimes.com/2009/11/12/10-years-later-looking-at-repeal-of-glass-steagall/, accessed 8 October 2018.

27  See Financial CHOICE Act of 2017, HR 10, 115th Cong. 2017–2018.

28  Kevin R Kosar, ‘Government-Sponsored Enterprises (GSEs): An Institutional Overview’, CRS Report for Congress (2007), available https://fas.org/sgp/crs/misc/RS21663.pdf, 2, accessed 5 October 2018 (quoting Thomas H. Stanton, Government Sponsored Enterprises: Their Benefits and Costs As Instruments of Federal Policy (Washington: Association of Reserve City Bankers, April 1988), p. v.).

29  In 1992 Congress passed the Federal Housing Enterprises Finance Safety and Soundness Act which gave GSEs an ‘affirmative obligation to facilitate the financing of affordable housing for low-income and moderate income families in a manner consistent with their overall public purposes, while maintaining a strong financial condition and a reasonable economic return’. See 12 USC § 4501(7); see also The White House, The Budget for Fiscal Year 2018, Government-Sponsored Enterprises, available at https://www.whitehouse.gov/sites/whitehouse.gov/files/omb/budget/fy2018/gov.pdf, accessed 5 October 2018.

30  See Michael S Barr, Howell E Jackson, and Margaret E Tahyar, Financial Regulation: Law and Policy, Foundation, 2016, 1170–9. Barr, Jackson, and Tahyar provide a comprehensive overview of the GSEs’ business model and associated critiques, from which much of the following material in this chapter is drawn. See also Fannie Mae and Freddie Mac, available at https://www.fhfa.gov/SupervisionRegulation/FannieMaeandFreddieMac/Pages/About-Fannie-Mae---Freddie-Mac.aspx, accessed 5 October 2018.

31  ibid, 1176 (excerpting Congressional Budget Office, ‘Federal Subsidies and the Housing GSEs’, 13–14, 2001).

32  ibid.

33  ibid.

34  ibid.

35  ibid, 1170–2 (excerpting Laurie Goodman, ‘A Realistic Assessment of Housing Finance Reform’, Urban Institute, (2014), 1–6).

36  Viral Acharya et al, Guaranteed to Fail: Fannie Mae, Freddie Mac and the Debacle of Mortgage Finance, Princeton, 2011, 136–8). Chapter two of this book discusses in detail how Fannie and Freddie increased the riskiness of their mortgage portfolio between the mid 1990s and 2003.

37  ibid, 41–2.

38  Barr, Howell, and Tahyar n 30, 1168.

39  White House, n 29, 1246–7 .

40  ibid.

41  ibid. It also bears noting that, though never used, on 13 July 2008, the Federal Reserve Board in Washington authorized the New York Fed to extend emergency loans to the GSEs. See Financial Crisis Inquiry Report, US Government Printing Office, 2011, 309–20.

42  Peter J Wallison, ‘US Housing Policy and the Financial Crisis’, in James R Barth and George G Kaufman (eds) The First Great Financial Crisis of the 21st Century, World Scientific, 2015, abstract.

43  Peter J Wallison, ‘Barney Frank, Predatory Lender’, Wall Street Journal, 15 October 2009, available at https://www.wsj.com/articles/SB10001424052748704107204574475110152189446, accessed 7 October 2018. But see Andra C Ghent, Rubén Hernández-Murillo, and Michael T Owyan, ‘Did Affordable Housing Legislation Contribute to the Subprime Securities Boom?’, Federal Reserve Bank of St Louis, Working Paper No 2012-005F (December 2014) (finding no evidence that housing policy increased subprime originations); Adam J Levitin and Janneke H Ratcliffe, ‘Rethinking Duties to Serve in Housing Finance’, Harvard Joint Center For Housing Studies, HBTL-12, 213 (October 2013) (same); David Min, ‘Faulty Conclusions Based on Shoddy Foundations’, Centre For American Progress, 1–3 (2011) (same).

44  See Barr, Howell, and Tahyar et al, n 30, 1175–6 .

45  See Alan Greenspan, Remarks, ‘Government-sponsored Enterprises’, 2005, available at https://www.federalreserve.gov/boarddocs/speeches/2005/20050519/, accessed 7 October 2018.

46  Acharya et al, n 36, 136–8.

47  Henry M Paulson, Jr, On the Brink, Hatchett Book, 2010, 57.

48  ibid.

49  Acharya et al, n 36, 4–5.

50  ibid, 137–8.

51  Indeed, there is a longstanding and ongoing debate regarding GSE reform. See, e.g., Victoria Finkle, ‘Mnuchin Wants GSE Reform in 2019. There’s A Problem With That’, American Banker, 30 April 2018, https://www.americanbanker.com/opinion/mnuchin-wants-gse-reform-in-2019-theres-a-problem-with-that, accessed 7 October 2018.

52  See, e.g., Rob Blackwell and Ian McKendry, ‘Breaking Down Hensarling’s GSE Reform Overture’, American Banker, 6 December 2017, https://www.americanbanker.com/news/breaking-down-hensarlings-gse-reform-overture, accessed 7 October 2018.

53  Shayerah Ilias Akhtar, ‘Export-Import Bank: Frequently Asked Questions’, Congressional Research Service, April 2016, available at https://fas.org/sgp/crs/misc/R43671.pdf, accessed 5 October 2018 (hereafter CRS, Ex-Im Bank).

54  ibid, 1–2. The lending focus of the Ex-Im Bank has shifted over time—from funding post-war reconstruction projects (in the 1940s), to infrastructure projects in developing countries (in the 1970s), to smaller projects and capital goods and services (in the 1980s). See ibid, 2.

55  ibid, 1.

56  The Charter of the Export-Import Bank of the United States, P L 114-94, codified at 12 USC, § 635 et seq, available at https://www.exim.gov/sites/default/files/2015_Charter_-_Final_As_Codified_-_02-29-2016.pdf, accessed 7 October 2018.

57  CRS, Ex-Im Bank, n 53, 2.

58  ibid, 4.

59  Ibid, 4–5.

60  ibid, 4. Sources of export finance include export-credit agencies, commercial banks, capital markets, and self-financing. Commercial banks account for about 80 per cent of the trade finance market. ibid, 5.

61  ibid.

62  See Jordan Jay Hillman, ‘Exim Bank as a Public Enterprise: The Role of Congress and the Executive Branch’, Northwestern Journal of International Law and Business (1982) 4, 374–76, available at https://scholarlycommons.law.northwestern.edu/cgi/viewcontent.cgi?referer=https://www.google.co.uk/&httpsredir=1&article=1122&context=njilb, accessed 7 October 2018.

63  See CRS, Ex-Im Bank, n 53, at 3.

64  ibid; Andrew Ackerman and Josh Zumbrun, ‘Export-Import Bank Could be a Drain on Taxpayers Next Year’, Wall Street Journal, 1 December 2017, available at https://www.wsj.com/articles/export-import-bank-on-track-to-be-a-drain-on-taxpayers-next-year-1512124201, accessed 7 October 2018.

65  ‘Reformers Not Welcome at Ex-Im Bank’, Wall Street Journal, 21 July 2017, available at https://www.wsj.com/articles/reformers-not-welcome-at-ex-im-bank-1500678548, accessed 7 October 2018.

66  ‘Garrett Is the Right Man To Clean Up Ex-Im’, Opinion, Wall Street Journal, 19 July 2017, available at https://www.wsj.com/articles/garrett-is-the-right-man-to-clean-up-ex-im-1500494241, accessed 7 October 2018.

67  12 USC, §635a(c). Ex-Im Bank, ‘Board of Directors’, available at http://www.exim.gov/about/leadership/board-of-directors, accessed 8 December 2017; CRS, Ex-Im Bank, n 53, 4; see ‘Reformers Not Welcome at Ex-Im Bank’, n 65.

68  ‘Garrett Is the Right Man To Clean Up Ex-Im’, n 66.

69  Statement of Michael T McCarthy, Deputy Inspector General, Export-Import Bank of the United States, Hearing on ‘Assessing Reforms at the Export-Import Bank’, 114th Congress, 1st session, 15 April 2015, 3–4.

70  ibid, 4.

71  Press Release, US Department of Justice, ‘Former Loan Officer at Export-Import Bank Pleads Guilty To Accepting Over $78,000 in Bribes’, 22 April 2015, available at https://www.justice.gov/opa/pr/former-loan-officer-export-import-bank-pleads-guilty-accepting-over-78000-bribes, 7 October 2018.

72  ibid.

73  ‘Garrett Is the Right Man To Clean Up Ex-Im’, n 66.

74  CRS, Ex-Im Bank, n 53, 27.

75  A negative conclusion in this respect is reached by R Gropp, A Guetller, and V Saadi in ‘Public Bank Guarantee and Allocative Efficiency’ (http://gcfp.mit.edu/wp-content/uploads/2017/09/Gropp-Guettler-Saadi.pdf, accessed 5 October 2018), 1 and 3 (state guarantee results in ‘fewer incentives to screen and monitor’ in the context of the Credit Process, which, in turn, makes less productive firms more likely to obtain funding, and thus reduces overall allocative efficiency).

76  German Council of Economic Experts (Sachverständigenrat), n 9, 29.

77  Very critical of the business model and investments strategies of the Landesbanken prior to the crisis German Council of Economic Experts (Sachverständigenrat), n 9, paras 240 and 245.

78  From the EU-perspective see Liikanen-Report, n 8, 32. For Germany, see Behr and Schmidt, n 7, 18, and 24.

79  The German Council of Economic Experts (Sachverständigenrat), n 9, para 240, see the savings bank also a ‘stabilizing factor’ within the financial system.

80  For recent data, see the 2017 Financial Stability Review of Deutsche Bundesbank (English version, available at: https://www.bundesbank.de/Redaktion/EN/Downloads/Publications/Financial_Stability_Review/2017_financial_stability_review.pdf?__blob=publicationFile accessed 5 October 2018), 71: an abrupt interest rate rise of 200 basis points would reduce the present value of the loan books of the German savings and cooperative banks by about 20 per cent across all maturities, whereas large private banks would only suffer from a reduction of about 2 per cent.

81  For a very instructive critical assessment of this theory, see T Tröger, ‘Too Complex to Work: Critical Assessment of the Bail-in Tool under the European Bank Recovery and Resolution Regime’, Journal of Financial Regulation (2018), 35.

82  See generally, Cary Coglianese, Jennifer Nash, and Todd Olmstead, ‘Performance-Based Regulation: Prospects and Limitations in Health, Safety and Environmental Protection’, Harvard Center For Business and Governments, Regulatory Policy Program Report No RPP-03 (2002).

83  Community Reinvestment Act, P L 95-128, 91 Stat 1147, Title VIII of the Housing and Community Development Act of 1977, 12 USC, § 2901 et seq.

84  P L 95-128, Stat 1147, Title VIII, §§ 802, 804, 91; see also Community Reinvestment Act, https://www.ffiec.gov/cra/history.htm, accessed 8 October 2018.

85  See, e.g., Neil Bhutta and Daniel Ringo, ‘Assessing the Community Reinvestment Act’s Role in the Financial Crisis’, 26 May 2015, available at https://www.federalreserve.gov/econresdata/notes/feds-notes/2015/assessing-the-community-reinvestment-acts-role-in-the-financial-crisis-20150526.html, accessed 7 October 2018.

86  Bank of England Act 1998, § 9C.

87  ibid, § 9E.

88  ibid, § 9F.