Sophisticated Institutional Lenders as Gatekeepers

Abstract

In the wake of the global financial crisis of 2008, commentators and scholars are aware of liquidity providers’ important roles in preventing another catastrophic systemic risk in the financial industry. Sophisticated Institutional Lenders (“SILs”), functioning as liquidity gatekeepers, can guard and control the gate through which credit flows into debtors’ business operation, and later on, flows out through the gate when the credit has served its purpose. That is to say, a lender-gatekeeper is able to decide ex ante whether the inflow of credit is allowable, and monitor ex post whether misconduct or other unlawful activity is active to jeopardize the smooth outflow of credit and its accompanying interest gains. The author believes that potential fraudulent activity and illegal misconduct can be better detected and deterred if a set of duties to blow the whistle, and to take corrective action, is imposed on SILs. Part I of this paper will explore the existing legal terminologies, and propose an operational definition of SILs. That definition will be used to develop a set of gatekeeper duties. Part II will explore classical and modern gatekeeper theory, and make out a case for why it is justifiable and desirable to allocate gatekeeper roles to SILs. Finally, Part III will develop an outline of the essential contents of SILs’ gatekeeper duties, and propose the general means of ensuring their compliance with those duties.