It appears that bank regulators have reached an agreement on new standards for “the world’s largest banks in an effort to create a more stable financial system.”
The deal would create new capital standards for banks, a move designed to prevent the companies from loading up on the risk and debt many saw as a precursor to the recent financial crisis. The new rules will force banks to hold more capital against a wider range of their loans and investments. It will likely push down profits at the world’s largest banks, many of which have warned such a move could drive up the cost of credit for borrowers and restrict credit.
But are these new standards enough? What about the control fraud that takes place at these banks?
Control fraud — as defined by William K. Black — takes place when “the CEO or head of state uses the entity as a ‘weapon'” to engage in fraud.
Since CEOs are behind the control fraud in most cases, regulators need to focus on enforcing the Sarbanes-Oxley Act, which holds CEOs and other senior executives accountable for “accuracy and completeness of their companies’ financial reports and to set up internal controls to assure the accuracy and completeness of the reports.”
It’s important to hold not just CEOs, but their associates as well, accountable because they have a personal incentive to engage in the fraud even at the expense of company profits (i.e. personal bonsuses); otherwise, a Gresham’s is set up in which only CEOs who are willing to engage in the control fraud will be hired.