Fit & Proper Requirements Effect on Financial Stability and the Composition of the Management Body in Danish Creditinstitutions

Abstract

This thesis is developed based on the danish legal requirements regarding members of the management body in credit institutions. The requirements are mainly an implementation of the European capital requirement directive 2013/36/EU, art.91, and aims to strengthen the institution's management body. The requirements are a response to the financial crisis in 2008, as it was identified that weaknesses in several credit institutions' corporate governance, lead to excessive risk-taking and poor monitoring within the management body. The purpose of this thesis is therefore to examine how the danish fit & proper requirements and the competent authority´s approval of new management members, corresponds to its purpose while also promoting diversity within the management body. More specifically, the legal analysis seeks to examine whether the legal requirements fulfill the purpose to sustain financial stability and maintain confidence in the financial sector. Furthermore, it explores whether the danish implementation and application of the requirements, when applied to assess new members of the management body, has an inhibitory effect on diversity. This has been done by first elaborating on the proportionality of the requirements in regard to its purpose, and thereafter by exploring the effects on diversity. The economic analysis seeks to explore whether the investors and credit institutions, in reality, would be able to identify candidates for the management body that also ensure its purpose, without the legal requirements and the competent authority´s approval. Lastly, the integrated analysis combines the findings of the legal and economic analyses, to explore different legal regimes and find the Kaldor-hicks efficient regime, meaning efficient from a societal perspective. The proposed regimes are created to both comply with the initial purpose of the rules, but also allowing institutions to promote diversity in the management bodies of credit institutions. The thesis concludes that danish implementation and application of the legal requirements are sufficient to ensure its purpose, but may have implications on diversity. Also, it finds that diversity should be incorporated further to the assessments to enhance its initial purpose. Institutions are able to identify suitable candidates themselves when incited to comply with the purpose of the rules, and a regime where they follow the legal requirements but need no approval from the competent authority if the candidates enhance management diversity, would be an efficient solution.