Abstract
Over just one week in 2023, depositor runs at a few U.S. banks threatened a worldwide banking crisis. Afterwards, the United States would suffer three of the biggest bank failures in the nation’s history; in Europe, Credit Suisse became the largest financial institution to fail since the 2007-2008 Global Financial Crisis. Stunned by this lightning-fast panic, lawmakers, regulators, and academics have called for significant changes to the U.S. financial regulatory framework. Leading among these proposals are calls to improve supervisory oversight of banks, to tighten existing regulations on banks, and to increase deposit insurance limits. But these proposals alone are insufficient to stop the next wave of bank collapses, and they might even exacerbate a central problem contributing to bank runs: the bankers themselves. Combining insights from banking regulation, corporate enforcement, and insurance law, we argue that proposed banking reforms should be paired with a credible sanctions regime imposed upon negligent bankers. Our approach would push oversight duties back into the C-suite through a civil penalty designed to disgorge compensation from a bank executive whose negligence substantially increases the risk of a bank collapse. We defend the theoretical basis for such an approach, including why a civil penalty, rather than criminal punishment, is the best solution to this problem; identify key features of our proposed liability regime, distinguishing it from previous proposals to hold bankers accountable; and then identify and evaluate preliminary implementation considerations for Congress and regulators to consider.
Disciplines
Banking and Finance Law | Law and Economics
Date of this Version
2-4-2025
Working Paper Citation
Logue, Kyle D.; Thomas, W. Robert; and Zhang, Jeffery Y., "Sanctioning Negligent Bankers" (2025). Law & Economics Working Papers. 282.
https://repository.law.umich.edu/law_econ_current/282
