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School of Law

Letter: A partnership model is a way to restrain excessive risk-taking

Professor Rosa Lastra has co-written a letter in the Financial Times in response to an article suggesting that policymakers have not focused on how to restrain excessive leverage

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Finance experts have responded to an article in the Financial Times, suggesting that policymakers have not focused on how to restrain excessive leverage. In a letter, co-written by Professor Rosa Lastra, from Queen Mary University of London, they say the main blame for the move into excessive debt lies with leverage on incentives and the self-interest of equity holders. "Shareholders are currently protected by limited liability from the downside of a risky gamble and, as holders of the residual claim on the company, their upside is unlimited". They discuss their proposal, published in the Journal of Financial Regulation, to divide equity holders into two classes - insiders and outsiders. The insiders, those with the power to monitor and control the corporations, should have multiple liability. The outsiders, those who lack this power, would continue to enjoy limited liability.

Read the full letter on the Financial Times (subscription required).

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