How Not to Break the Bank
The swift collapse of Silicon Valley Bank (SVB) — the second-largest bank failure in U.S. history — came as a shock to many and contained echoes of the events of 2008 when Bear Stearns failed, ushering in the global financial crisis of 2008–2009. This week, following the federal takeovers of SVB and then Signature Bank, stock markets continued to be volatile over concerns that the bank failure could spread and cause risk to the broader financial system.
Through their scholarship and in the media, faculty members Natasha Sarin and Yair Listokin ’08 each have points to make about possible ways to improve the banking industry, regulation, and corporate law. Their recent journal articles, written before the recent bank failures, point out some of the flaws in the current regulatory system and steps that should be considered moving forward.
Market information should be incorporated into regulation to create “dynamic regulation.”
Though financial regulations have improved, Associate Professor Natasha Sarin, a former Treasury Department official, says we should pay attention to market data to assess bank health, not just traditional regulatory measures, which failed to provide useful indicators of distress during the Great Recession.
In a 2021 article, Sarin writes that there should be a debate in the financial regulatory community about measures of bank health. “Market measures provide a more dynamic assessment of the evolution of financial stability during this period. Regulators can, and should, monitor this information. Yet they do not.”
According to Sarin, continued reliance on traditional regulatory measures of bank health must be reconsidered.
“Given the known failure of these measures to provide useful and timely indicia of distress during the Great Recession, our continued sole reliance on them is puzzling,” she writes. “Market data are plentiful and informative; ignoring them would be extremely ill-advised for our regulatory regime.”
Read: “Dynamic Regulation” in the Southern California Law Review
In the Press: “‘Financial Regulation Has a Really Deep Problem’” an interview with Natasha Sarin in The Atlantic
Banks at risk should owe a fiduciary duty to depositors — not just to their shareholders.
Banks like Silicon Valley Bank could have raised equity before it was too late and a collapse was certain. Under corporate law, banks owe a fiduciary duty to shareholders, but not to depositors. Raising equity would dilute shareholder value, even though it would also reduce the risk of a bank run, according to Professor Yair Listokin ’08. And the failure of a major firm can affect the entire economy, not just shareholders.
In a 2018 article in the Harvard Business Law Review, Listokin and co-author Inho Andrew Mun ’17 write that few have asked how corporate law — in addition to financial regulation — should govern dealmaking in financial crises.
“Corporate law as applied to systemically important, failing target firms during crises should change as follows: (1) replace shareholder merger voting rights with appraisal rights, and (2) alter fiduciary duties so that directors and officers of those failing target firms consider the interests of the broader economy.”
Read: “Rethinking Corporate Law During a Financial Crisis” in the Harvard Business Law Review
In the Press: “To Prevent Bank Runs, Fix Bank Governance” an op-ed by Yair Listokin in The Hill
Natasha Sarin is an Associate Professor of Law at Yale Law School with a secondary appointment at the Yale School of Management in the Finance Department. Previously, she served as Deputy Assistant Secretary for Economic Policy and later as a Counselor to Treasury Secretary Janet Yellen at the United States Treasury Department, where her work focused on narrowing the gap between the taxes owed by the American public and those collected by the Internal Revenue Service. Her research centers on public finance and financial regulation, with work on tax policy, household finance, insurance, and macroprudential risk management.
Yair Listokin is Deputy Dean and the Shibley Family Fund Professor of Law at Yale Law School. His scholarship studies tax law, corporate law, bankruptcy law, contract law, and the law of central banking. His research emphasizes a macroeconomic perspective that differs dramatically from the microeconomic perspective that dominates law and economics. In his 2019 book, Law and Macroeconomics: Legal Remedies to Recessions (Harvard University Press), Professor Listokin argues that law offers an underdeveloped but desperately needed tool for stabilizing depressed economies when monetary and fiscal policy prove inadequate.