I had the honor of being nominated by President Biden in 2021 to head the Office of the Comptroller of the Currency, the top regulator of federally chartered banks. If confirmed, I would have been the first minority woman — an immigrant — to lead the 160-year-old agency.
It didn’t happen. The banking industry and its political allies waged a highly public campaign to block my candidacy and called my academic work, which examined the many failings of our financial system and called for stronger public oversight, “un-American.” But what ultimately sunk my chances was the fact that I openly opposed loosening regulatory restrictions on America’s banks.
Now we are living through another banking crisis. It’s too early to tell how it will play out over the next few months or what long-term impact it will have. What is already clear is that when things go bad, the American public absorbs private banks’ losses and takes on their liabilities. We are the banking system’s true residual risk holder.
That’s why it is important to start thinking about how we can address the underlying causes of recurring financial crises. There is already an emerging consensus, at least on the left, that we need to reinstate the provisions of the Dodd-Frank Act that mandated stricter supervision for banks with more than $50 billion in assets but were rolled back in 2018. I fully support reversing that costly mistake. Doing so wouldn’t affect a vast majority of small, truly community-serving banks. It would merely restore the enhanced oversight of those banks whose problems, as we have learned, can trigger systemic runs.
But simply turning the dial back to 2018 is not enough. We need to think bigger and bolder. While rebuilding and strengthening the existing regulatory and supervisory tools, we should also explore new, potentially more effective ways to protect the American public from financial crises.
One big, outside-the-box idea is to create a “golden share” that the federal government would hold in certain systemically significant banks. Unlike regular corporate stock, this type of share would carry only very limited, mainly representational, rights. It would be structured to serve a single purpose: to give the American public a seat at the table where banks make decisions on how to manage — or perhaps not manage — the risks we ultimately may have to bear.
The concept of a government-owned golden share in a private corporation is not new. In the 1980s, Margaret Thatcher’s Conservative government used golden shares in the newly privatized large British firms, including Britoil and British Aerospace, in order to prevent foreign takeovers of strategically important industries. Emulating Britain’s approach, many other countries have used this mechanism to carve out special voting and other corporate governance rights that best served their national interests. The beauty of the golden share is its flexibility. It can be tailored to serve any public goal.
As I argued in my prior work, we can creatively adapt this old governance mechanism to help prevent systemic financial crises. Here’s how it would work: The federal government would receive a unique golden share in each individual bank above a certain size. The size threshold can be set at $50 billion in assets, well below the current $250 billion threshold for subjecting individual banks to enhanced supervision. The issuance of the golden share would also be mandatory for any financial institution, regardless of size, that receives government emergency assistance — in other words, a “bailout.” The government wouldn’t have to contribute any capital in exchange for its golden share, nor would it be automatically entitled to any dividends or profits of the bank (although it could potentially participate in the upside when a bank’s stock rises, depending on the circumstances).
The share would not be transferable and would simply allow the federal government to place one director on the bank’s board. Under normal circumstances, this government-appointed board member would not interfere in the bank’s day-to-day business affairs and would just keep a watchful eye on the proceedings. In this passive mode, the golden share functions as a purely informational device. This board member’s mere presence, however, could help to discipline bank management.
If there are credible reasons to worry about the bank heading down a dangerous path — for instance, rapid growth in the riskiness or concentration of the bank’s assets or liabilities, repeated legal and regulatory violations, or credit downgrades or unsatisfactory supervisory ratings — the golden share would spring into action. The government-appointed director would be able to propose or block certain corporate actions, call for a shareholder vote on various matters and pursue other remedial measures. These actions would have to be well considered and documented, and comply with the appropriate procedural safeguards. Once the immediate danger passes and the correction is underway, the golden share would go back to sleep. The ship would be safely in calm waters.
This model may seem like government takeover to some, but that’s not how it is designed to work. I envision the golden share as a dynamic mechanism for carefully balancing the public and private interests in how safely large banks are run. The idea is to create a sliding scale of government management rights, triggered by specified events that warrant a quick targeted intervention — and nothing more. These rights would always be conditional and temporary, never absolute or permanent.
The golden share device would supplement, not substitute for, the bank’s business managers and supervisors, all of whom would continue doing their jobs. It is a way to adapt a familiar instrument of corporate control — a share with contingent rights — to provide an early-warning, early-action system for preventing potentially devastating crises. As a corporate governance tool, the golden share can be activated from within the firm faster and more efficiently than any outside supervisory tool can. It is an emergency brake on individual large banks’ activities presenting a potentially serious threat to the public.
Having it in place at Silicon Valley Bank, for example, could have helped to avoid the now obvious blunders in the bank’s internal risk management. The golden share director could have sounded the alarm when management decided not to heed external warnings about its inadequate risk controls. As a board member with a unique public mandate, that director would have been ideally positioned to spot and flag the problems with unhedged interest rate risk and overreliance on wholesale deposits, which Silicon Valley Bank’s executives were willing to ignore.
Of course, instituting such a novel governance regime would be technically challenging. Many legal, administrative and other issues would have to be addressed before any such scheme could be established. It would also require Congress to pass legislation, which is not its strongest suit these days. But every reform starts with an idea. My goal here is to flag one potential reform we should consider if we are serious about ending the current dysfunctions in our financial system.
The current crisis, once again, revealed that banking is fundamentally a public-private enterprise. Banks’ privately profitable business is deeply infused with public interest. The golden share device, if properly used, would ensure that their internal governance is accordingly public-minded. It will not happen unless we, the American public that backs banks’ debts, make it happen. It’s high time we did.
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