Jay Cullen

Excessive Leverage and Bankers’ Pay: Governance and Financial Stability Costs of a Symbiotic Relationship

Debt has traditionally been viewed as an effective corporate governance tool. On the other hand, high leverage levels can lead to rapid expansion of the size of bank assets maximizing, in the short-to-medium term, banks return on equity. In the absence of regulatory controls on leverage, all it takes to assume excessive risks, even for benign bankers, is to imitate competitor business strategies. This form of herding can be motivated by compensation considerations or by career concerns. However, while bankers’ compensation has been a major factor behind bank short-termism, excessive leverage creates serious governance/agency costs even in the absence of compensation incentives. Therefore, a reasonably protective leverage ratio can prove an effective measure in containing rent seeking and smoothing up the leverage cycle to improve bank governance, prevent deep recessions, and safeguard financial stability.

Executive compensation in imperfect financial markets

The recent financial crisis and associated real estate bubble demonstrated the damage that can be caused by imperfect financial market pricing. On the basis of these imperfections, strong financial returns earned by financial institutions in the run-up to 2008 were, in fact, illusory. Executive Compensation in Imperfect Financial Markets explores the relationship between bank lending, real estate markets and stock market prices. Offering a heterodox view of financial market pricing and its relationship with executive pay, this book offers a competing interpretation of the recent crisis, which emphasises the role of bank leverage and investor expectations in generating instability - particularly through the interaction of financial institutions with the real estate market. In the process, it reveals that equity-based compensation incentivized increased bank leverage, which was a cardinal cause of the crisis. This timely book will be an essential read for all legal scholars and policy analysts operating in the field of banking and finance, as well as all those seeking a more rounded understanding of the financial crisis.

Securitisation, Ring-Fencing and Housing Bubbles: Financial Stability Implications of UK & EU Bank Reforms

Declines in property markets played a central role in the Great Financial Crisis. Off-balance sheet financing activities, particularly securitisations, were used to fund higher volumes of bank lending, concentrated in real estate. Post-crisis reforms and low investor appetite for securitisations have so far impeded any reincarnation of such markets. In response, the European Union has proposed a new Securitisation Regulation, with the aim of restarting EU securitisation markets. This article explores the possible legal and economic significance of this Regulation and argues that current analyses of the likely effects of securitisation on asset markets, particularly housing markets, are deficient. Instead of highlighting flaws in the securitisation process through improved incentives – which I term ‘process-focused’ regulation – analysis of incentives ought to concentrate on the excessive credit-origination which techniques such as securitisation facilitates. This is particularly relevant to housing bubbles, the greatest threat to financial stability. Housing bubbles in general are driven by over-optimistic expectations about future house prices, which are shared by both borrowers and investors. Improving incentives in credit-channel widening structured finance when all parties are over-optimistic is unlikely to guard against future bubble formation. Such factors have added significance for the UK market in light of structural reforms to the UK banking sector (so-called “ring-fencing�?), which are likely to result in today’s large UK universal banks becoming monoline mortgage lenders.