III Reforming finance: systemic risk and accountability
Why manager liability fails at controlling systemic risk
- 7.1 Introduction page 161
- 7.2 Manager liability: not strict but fault-based 162
- 7.3 Defining the standard of care 166
- 7.4 The consequences of uncertain care standards 176
- 7.5 Conclusion 180
The global financial crisis raises the question whether bank managers should be held accountable for taking excessive risk. This chapter cautions that manager liability has very little promise as a safeguard for financial stability. This claim rests on a twofold argument: First, neither prudential regulation nor the general duty of care provides a sufficiently specific definition of permissible risk taking. As a consequence, managers face considerable uncertainty on the applicable standard of care and hence on how they can avoid liability. Second, exposing managers to a significant risk of liability for losses is inconsistent with their role as agents (corporate organs). Performance pay and other incentives will be adjusted to offset the risk-dampening effect of liability. The resulting incentive scheme for managers will be more costly and less effective in controlling systemic risk.