Regulation of Banks and Investment Banks: Basel I, II and III

Abstract

A director of a company owes the company a duty of care and a duty of loyaty. In general, under the ‘business judgement rule’, if a board of directors exercises these duties appropriately, the members of the board will be protected from liability (to shareholders) for their actions. In effect, there is a presumption that, in making business decisions, directors act on an informed basis. However, this presumption can be overcome by showing that the board was grossly negligent in its decision-making. The directors and officers of a bank thus have the responsibility of, amongst other things, minimising the chance of their company failing due to liquidity or solvency problems which they could have anticipated. This responsibility arises from general company law. However, because of the importance of banks to the economic stability and growth of an economy, governments generally do not just rely on company law. Instead they have set up a regulatory framework which banks must follow. This framework is designed not only to minimise the risk of a bank collapsing and the cost of rescue should it collapse, but also to try to ensure that it does not act against the interests of its customers. That banks may do this, even with regulation, is emphasised in a statement by the Governor of the Bank of England in an interview in 2011: Since ‘Big Bang’ in financial services in the 1980s, Mr King goes on, too many in financial services have thought if it's possible to make money out of gullible or unsuspecting customers, particularly institutional customers, that is perfectly acceptable. Interview with Charles Moore, The Daily Telegraph, 5 March 2011.