Banking regulation is first and foremost preoccupied with the problem of excessive risk-taking by banks and other leveraged financial institutions, which can lead to bank runs and panics and their resulting high economic costs. In recent decades, regulators have sought to curb bank risk-taking almost exclusively through external “safety and soundness” regulations, emphasizing capital requirements, disclosure, and an intensive examination process. Modern banking regulation, both in the United States and abroad, has largely ignored the internal governance of banks and other financial institutions. Surprisingly, this is true even in the aftermath of the financial crisis, which seemed to illustrate the shortcomings of relying exclusively on external regulatory restrictions. To the extent that policymakers have considered financial institution governance, they have primarily done so through the lens of the corporate governance literature, which focuses on shareholder agency costs and generally promotes solutions that best align manager and shareholder interests.

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