This Article engages that challenge and introduces a new kind of financial institution—a liability holding company (LHC)—that appropriately balances the social costs of excessive private leverage with the purported benefits for corporate governance that such leverage might create. Our proposal places an increased-liability version of the bank’s equity in a conjoined but separately controlled entity, the LHC, which also owns other assets to which the banks’ liabilities have recourse in the event of failure. The equity shares of the LHC—a holding company subject to a unique regulatory regime supervised by the Federal Reserve, similar to bank holding companies—are then traded in public markets. The LHC thus aims to eliminate or, at least, to greatly reduce the role of the government as the effective guarantor of the systemically important financial institutions (SIFIs), thereby reducing the distortions created by current implicit governmental guarantees. It additionally allows banks the benefits of two boards: an advising board that the bank managers may appoint and the monitoring board that is housed at the LHC and appointed by the LHC’s own public shareholders. This dual-board structure resolves some important issues raised in the longstanding debate about the role that corporate boards should play. We discuss in detail how this proposal would function within the present legal and regulatory environment particularly within the contexts of bank regulation, corporate governance, and the Dodd-Frank Act—and address counterarguments and alternative proposals.
UCLA Law Review