This article first considers the possible liability of the JP Morgan board in the London Whale matter. This discussion is not meant to assign liability in that case. Rather, the London Whale episode is considered as a springboard to a broader discussion of big bank officer and director liability. While it may be tempting to shrug off the regulatory implications of the London Whale episode because the losses did not threaten the solvency of JP Morgan, the significance of such management failures should not be ignored. Effective management of large banks is essential to financial stability. The type of poor management potentially at play in the London Whale matter could implicate the effectiveness of management in areas that have significant financial stability implications. For example, while London Whale suggests lax management in the bank’s trading operations, this could be a red flag regarding management deficiencies in other areas of operations such as cybersecurity or data management. Since effective bank management is essential to financial stability, consideration of incentives for effective management, like the personal liability of officers and directors, remains an important issue.
Following the discussion of the litigation in the London Whale case, this article moves on to consider the existing administrative enforcement powers of the banking agencies and how these powers might be applied in a case of risk management failure. This article uses the London Whale experience to explore the statutory opportunities as well as challenges faced by the banking agencies in utilizing their administrative enforcement powers.
Finally, this article considers bank director liability in the context of the enhanced supervisory regime put in place following the Financial Crisis. Traditional mechanisms for monitoring management behavior, in the form of shareholder derivative claims of breach of fiduciary duty, are not well suited to the task of monitoring bank managers’ effectiveness in limiting the externalities that lead to financial instability. While the purpose of agency enforcement powers is squarely prudential (i.e., meant to ensure the safe and sound operation of financial institutions), current administrative enforcement powers do not appropriately supplement and support Congress’s vision of enhanced supervision of large banks. In particular, the fact that negligent or grossly negligent behavior does not trigger the agencies’ removal or prohibition power undermines the goals of enhanced supervision of large banks.
Heidi Mandanis Schooner, Big Bank Boards: The Case for Heightened Administrative Enforcement, 68 ALA. L. REV. 1011 (2017).