I study a model of self-fulfilling bank runs where government-provided deposit insurance covers small (retail) deposits but not large (wholesale) deposits. The share of the banking system that may be affected by runs depends on the distribution of retail and wholesale deposits across banks. The magnitude of runs is minimized if banks with both retail and wholesale depositors (reminiscent of commercial banks) coexist with banks that cater only to wholesale depositors (reminiscent of shadow banks). The shadow banking sector should be large enough to absorb enough wholesale deposits from commercial banks to keep them shielded from runs. In a decentralized equilibrium, the magnitude of runs tends to be larger than optimal as a result of wholesale depositors’ incentive to invest in the banks with the highest share of retail depositors.

This article traces the origin of too-big-to-fail policy in modern US banking to the bailout of the $1.2b Bank of the Commonwealth in 1972. It describes this bailout and those of subsequent banks through that of Continental Illinois in 1984. During this period, market concentration due to interstate banking restrictions is a factor in most of the bailouts and systemic risk concerns were raised to justify the bailouts of surprisingly small banks. Finally, most of the bailouts in this period relied on the Federal Deposit Insurance Corporation's use of the Essentiality Doctrine and Federal Reserve lending. A discussion of this doctrine is used to illustrate how legal constraints on regulators may become less constraining over time.

Good corporate governance of banks is of a vital concern to banks themselves as well as to the banking supervisors. During the past decade, listed banks and even non-listed institutions worldwide started to publicly emphasise that good corporate governance is of vital concern for the company, and even to adopt individualised corporate governance codices. In turn, the Basel Committee on Banking Supervision already published two editions of a guideline entitled ‘Enhancing corporate governance for banking organisations’ which reflects the supervisors' taking on the issue to perfection. Last but not least, two years into the financial crisis, the issue of banks' good corporate governance has started to attract pronounced interest, with the OECD taking a leading role. Against this backdrop, the article, on the one hand, discusses the particularities of banks' corporate governance – due in large part to banking regulation and to deposit insurance – in a principal-agent framework, and, on the other hand, presents the supervisors' financial stability perspective taking the Basel Committee's guidance as a starting point. The article concludes with reflections on some tentative lessons from the current crisis for (banks') good corporate governance: banks' corporate governance differs from that of a generic firm. Deposit insurance and prudential regulation, while aimed at compensating for deficits in the monitoring and control of banks, both act to exacerbate the particular problems that are inherent in banks' corporate governance. From this perspective, banking regulation and banks' corporate governance interact as the driving forces of a vicious circle that produces ever more regulation. Hence, one may doubt whether banks' corporate governance should map the way forward for corporate governance in general. In particular, this holds true for the way forward to regulating bankers' pay.