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In this AEI Events Podcast, AEI’s Peter J. Wallison welcomes Sanjai Bhagat of the University of Colorado Leeds School of Business to discuss Dr. Bhagat’s new book, Financial Crisis, Corporate Governance, and Bank Capital (Cambridge University Press, March 2017).
Dr. Bhagat emphasizes the Dodd-Frank Act’s costs to the US economy and highlights that, despite its stated intentions to eliminate “too big to fail,” investors and economic policymakers still believe that banks are still too big to fail. To address systemic risk and prevent a future financial crisis, bank executive compensation needs to be addressed. To this end, Dr. Bhagat emphasizes the importance of aligning management incentive with sound financial practices, and he suggests restructuring bank executive and director incentive program to include only restricted stock and restricted stock options with long vesting periods. He also underlines the importance of financing banks with considerably more equity. He clarifies that the 2007–08 financial crisis was not exacerbated by misalignment of corporate management incentive, but that this misalignment exacerbated the financial crisis.