The Legal Structure of Commercial Banks and Financial Regulation – Does organizational form matter for the design of bank regulation?

Abstract

Do the different ways that commercial banks are legally organized matter for the design of financial regulation? It is often assumed that most commercial banks are set up as investor-owned business corporations. However, this is not always the case. In many jurisdictions, banks are legally organized using a plethora of organizational forms, which include: co-operatives, mutual associations and even nonprofit entities. Thus, some of the distinctive legal attributes and features of these non-corporate banks are not regulated by corporate law – but rather by specialized statutes (e.g. cooperative law, the law of nonprofit entities, etc.). Moreover, many banks are comprised of groups of many different legal entities. Given such divergences in the legal attributes and the regulation of existing bank organizational forms, important questions arise. Does banking regulation take such organizational differences into account? And if not, what are the consequences of failing to take heed to such differences? This thesis attempts to answer some of these and other closely related questions, such as: what are the predominant legal forms used for organizing commercial banking activities in major jurisdictions today? What economic features make a co-operative bank different to a corporate bank, or different to a mutual bank? What is the relationship between bank capital, liquidity and leverage standards, and organizational forms? Do international standard setting bodies, like the Basel Committee on Banking Supervision (BCBS) and the Financial Stability Board (FSB), take into account non-corporate banks when they design, propose and implement capital and liquidity standards? The study argues and concludes that bank legal forms matter for financial regulation. The study focuses on three specific instances where the interplay between legal forms and financial regulation is found to be significantly important. These are: (1) capital, liquidity and leverage standards (chapter four), (2) bank resolution and crisis management (chapter five) and (3) for the ongoing design and implementation of banking structural reforms in the aftermath of the financial crisis (chapter six). The legal structure of banks is important because each type of organizational form entails a ‘package’ of economic attributes and a hierarchy of both creditors’ and owners’ rights (property rights). The economic features inherent to different legal forms interact with the incentives created by financial regulations, such as capital and liquidity requirements, deposit protection insurance schemes and bank resolution regimes. In order for financial regulation to be effective, it should acknowledge the incentives and the rules that the law allocates to different bank stakeholders through organizational forms.