Laurie McCauley Provost and Executive Vice President for Academic Affairs | University of Michigan-Ann Arbor
Laurie McCauley Provost and Executive Vice President for Academic Affairs | University of Michigan-Ann Arbor
A recent analysis by the University of Michigan suggests that bank executives should face civil monetary penalties if their negligence leads to bank failures or bailouts. The study, conducted by Jeffery Zhang and colleagues, examines the banking crisis following the collapse of Silicon Valley Bank in 2023. It argues that current regulatory measures are insufficient to prevent future failures.
“This article brings together our wide range of expertise in proposing a targeted solution to tackle the problem of moral hazard in banking and improve financial stability,” said Jeffery Zhang, assistant professor at the Law School.
The researchers propose holding individual bank executives financially accountable for negligence that significantly increases the risk of a bank failure. “By imposing civil monetary sanctions, our proposal aims to realign executive incentives and mitigate reckless risk-taking,” said Kyle Logue, professor at the Law School.
The proposed framework would apply financial penalties to executives at all U.S. banks when their negligent actions contribute to a bank collapse or require emergency government intervention. The recommended sanction includes clawing back up to five years’ worth of total compensation, with enhanced penalties for gross negligence or misconduct.
“If executives know they could lose years of compensation for reckless decision-making, they’ll have a much stronger incentive to act responsibly,” said Will Thomas, assistant professor at the Ross School of Business. “This system is designed to deter risky behavior while avoiding the impracticalities of criminal prosecution.”
To implement this sanctions regime, Congress might amend the Federal Deposit Insurance Act to strengthen sanctions provisions and lower enforcement burdens. Additionally, restricting directors and officers insurance from covering these penalties could ensure that executives personally bear financial consequences.
The researchers also suggest empowering private actors like whistleblowers or shareholders to initiate enforcement actions against negligent bankers, thus increasing accountability beyond traditional regulatory oversight.
The article will be published in Volume 78 of the Stanford Law Review but is currently available on SSRN.
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