This Article considers the federal banking regulation regime implemented in response to the widespread bank failures of the 1980s and early 1990s. The first section of the Article examines the moral hazard problem created by the presence of the deposit insurance scheme and the market discipline debate that has attempted to correct the moral hazard problem. The Author argues that the law has evolved to make bank holding companies the primary enforcers of market discipline. The Article’s second section examines the specific regulatory changes that have been designed to create an incentive for bank holding companies to impose discipline on bank management. The source of strength doctrine, regulatory agreements, capital restoration plans, the elaboration of a general fiduciary duty to regulators, equitable subordination, cross-guarantee provisions, preferences, and fraudulent conveyances all are part of a strategy to make bank holding companies more responsible for bank failure.
The third section of the Article looks at the potential effects of the regulatory scheme. The Author argues that the regulatory attempts to make bank holding companies the enforcers of market discipline are misguides because they will not achieve their intend effect. Instead, the banking industry will be saddled with excessive regulations that will place it at a competitive disadvantage relative to the other players in the financial services industry.
Eric J. Gouvin, Shareholder Enforced Market Discipline: How Much Is Too Much?, 16 ANN. REV. BANKING L. 311 (1997).