The Adam Smith's Banking System: The sources of the analysis of modern banking governance

Nissaf Ben Ayed and Gerard Mondello
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Nissaf Ben Ayed: GREDEG - Groupe de Recherche en Droit, Economie et Gestion - UNS - Université Nice Sophia Antipolis (1965 - 2019) - CNRS - Centre National de la Recherche Scientifique

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Abstract: While in this twenty-first Century (XXIe), questions are rising about the banking system governance and the "post-crisis governance reforms", it is useful to revisit the founding debates of the governance of the twentieth century (XXe). In this area, traditionally, we follow Berle and Means (1932) by tracing separation between shareholders and managers. However, Adam Smith's banking system view already highlighted the importance of strategic choice of bank executives (risk) in the emergence of crisis phenomena. These strategic choices refer to the relationship between shareholders and managers. From his analysis, one can safely conclude that the way in which ‘Ayr' bank is managed, that is the role of its governance, constitutes a key determinant of the excessive risk and the fragility of this bank. Specifically, we show that the dispersed Ayr bank's ownership structure, the asymmetric information between Board and Shareholders and the lack of directors expertise and independence for inuring transparency increased both the bank's risk taking and its fragility. The regulation issue of the banks activity is at the heart of Smith's banking theory. It finds an echo in controversies over reports of credit and currency issues in the19th century. Smith's support to banking regulation seems to have been a response to the 1772 Scottish bank crisis understood as the first modern banking crisis. In Smith's opinion, the banks should be regulated to ensure the correct reflux of credit currency and avoiding an excessive transformation risk.

Keywords: Ayr crisis; risk taking behavior; transformation risk; financial fragility; credit and currency issues.; bank governance and regulation (search for similar items in EconPapers)
Date: 2015-06-11
New Economics Papers: this item is included in nep-acc and nep-his
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Published in 32nd GdRE International Symposium on Money, Banking and Finance, GdRE Finance, Jun 2015, Nice, France

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