Skip to main content
SpringerLink
Log in

Are private banks the better banks? An insight into the principal–agent structure and risk-taking behavior of German banks

  • Published:
Journal of Economics and Finance Aims and scope Submit manuscript

Abstract

In this study, we hypothesize that the distinguishable principal–agent relationships of German banks significantly influence the risk-taking attitudes of bank managers. In particular, we substantiate the theory that banks owned by dispersed shareholders, or federal state authorities, face a higher relevance of principal–agent problems than other banking sectors due to the lack of monitoring bank managers. Our results show that lack of accountability allows bank managers the liberty to participate in risk-taking behavior. First we present, from the bank owners’ viewpoint, a theoretical model to explain three factors of principal–agent relationships used to determine the highest probability of choosing an optimal portfolio of risky assets. The three factors are: the ability to control bank managers, the risk pooling capabilities of bank owners and bank managers, and the incentive of seeking high returns. To support our hypothesis, we apply an empirical study to the distance-to-default of different German banking sectors. This demonstrates that the risk-taking attitudes of banks are closely related to banks’ ownership structures. Consequent to our findings, we suggest legislative and regulatory authorities increase vigilance in terms of principal–agent problems within certain sectors of the banking industry.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. Caprio et al. (2007) classify a bank as having an influencing owner if the shareholder has voting rights of more than 10 %.

  2. Laeven and Levine (2009) argue that owners might compensate for the loss of utility from capital requirements by selecting riskier investment strategies. Thus, it seems likely that stricter capital regulations and banking regulations correlate with greater risk when the bank has a sufficiently powerful owner.

  3. Iannotta et al. (2007) find some empirical evidence that public sector banks have poorer loan quality and higher insolvency risk than other banks. Furthermore, their results indicate that mutual banks (savings banks and cooperatives) rely on better loan quality and lower asset risk than both private and public sector banks.

  4. Erkens et al. (2009) show that banks that applied CEO compensation contracts with a heavier emphasis on annual bonuses faced larger losses during the financial crisis. Bebchuk and Spamann (2010) suggest using the regulation of banks’ executive pay structures as an important element of financial regulation because of the significant relationship between banks’ executive pay and the risk-taking behavior of banks’ executives.

  5. Boyd and De Nicolò (2005) argue that banks behave more riskily as their markets become more concentrated.

  6. We define DD as the ratio of the sum of the capital asset ratio (CAR) and return on assets (ROA) to the standard deviation of ROA (σ [ROA]). See Boyd and Graham (1986).

  7. See Saunders et al. (1990), Stultz (2005), Beck et al. (2009), and Barry et al. (2011).

  8. See Sinclair-Desgagne and Spaeter (2011), who developed a model that describes the behavior of prudent principals.

  9. Bankscope database, Bureau van Dijk Electronic Publishing.

  10. We define the federal state authorities as the basis of our factored variable.

References

  • Adrian T, Shin HS (2010) Liquidity and leverage. J Financ Intermed 19(3):418–437

    Article  Google Scholar 

  • Altunbas Y, Evans L, Molyneux P (2001) Bank ownership and efficiency. J Money, Credit, Bank 33(4):926–954

    Article  Google Scholar 

  • Amihud Y, Levy B (1981) Risk reduction as a managerial motive for conglomerate mergers. Bell J Econ 12:605–617

    Article  Google Scholar 

  • BaFin Bundesanstalt für Finanzdienstleistungsaufischt (2011) Rundschreiben 4/2011 (VA)—Hinweise zur Anlage des gebundenen Vermögens von Versicherungsunternehmen

  • Barry TA, Lepetit L, Tarazi A (2011) Ownership structure and risk in publicly held and privately owned banks. J Bank Financ 35(5):1327–1340

    Article  Google Scholar 

  • Bebchuk L, Spamann H (2010) Regulating bankers’ pay. Georgetown Law J 98(2):247–287

    Google Scholar 

  • Beck T, Laeven L (2008) Resolution of failed banks by deposit insurers: cross-country evidence. In: Demirguc-Kunt A, Kane E, Laeven L (eds) Deposit insurance around the world, issues of design and implementation. MIT Press, Cambridge

    Google Scholar 

  • Beck T, Hesse H, Kick T, von Westernhagen N (2009) Bank ownership and stability: evidence from Germany. Vox Research-based policy analysis and commentary from leading economists

  • Beltratti A, Stultz R (2009) Why did some banks perform better during the credit crisis? A cross-country study of the impact of governance and regulation. Working paper series (National Bureau of Economic Research), no. 15180

  • Berger AN, Clarke GR, Cull R, Klapper L, Udell GF (2005) Corporate governance and bank performance: a joint analysis of the static, selection, and dynamic effects of domestic, foreign, and state ownership. J Bank Financ 29(8–9):2179–2221

    Article  Google Scholar 

  • Boyd J, De Nicolò G (2005) The theory of bank risk taking and competition revisited. J Finance 60(3):1329–1343

    Article  Google Scholar 

  • Boyd J, Graham S (1986) Risk, regulation and bank holding company expansion into non-banking. Quarterly Review, Federal Reserve Bank of Minneapolis

  • Brunnermeier MK (2009) Deciphering the liquidity and credit crunch 2007–2008. J Econ Perspect 23(1):77–100

    Article  Google Scholar 

  • Caprio G, Laeven L, Levine R (2007) Governance and bank valuation. J Financ Intermed 16(4):584–617

    Article  Google Scholar 

  • Cihák M, Hesse H (2007) Cooperative banks and financial stability. IMF Working Paper WP/07/2

  • Cullis J, Jones P (2009) Public finance and public choice. Oxford University Press, Oxford

    Google Scholar 

  • De Nicolò G, Loukoianova E (2007) Bank ownership, market structure and risk. IMF Working Papers WP/07/215

  • Demsetz H, Lehn K (1985) The structure of corporate ownership: causes and consequences. J Polit Econ 93:1155–1177

    Article  Google Scholar 

  • Erkens D, Hung M, Matos P (2009) Corporate governance in the 2007–2008 financial crisis: evidence from financial institutions worldwide. J Corp Finance

  • Esty BC (1998) The impact of contingent liability on commercial bank risk taking. J Financ Econ 47(2):189–218

    Article  Google Scholar 

  • Esty B (1997) Organizational form and risk-taking in the savings and loan industry. J Financ Econ 44:25–55

    Article  Google Scholar 

  • Fonteyne W (2007) Cooperative banks in Europe—policy issues. IMF Working Papers

  • Fraser D, Zardkoohi A (1996) Ownership structure, deregulation, and risk in the savings and loan industry. J Bus Res 37:63–69

    Article  Google Scholar 

  • Gropp R, Köhler M (2010) Bank owners or bank managers: who is keen on risk? Evidence from the financial crisis. Zentrum für Europäische Wirtschaftsforschung, Research Discussion Paper. No. 10-013

  • Hansmann H (1996) The ownership of enterprise. The Belknap Press of Harvard University Press, Cambridge

    Google Scholar 

  • Hardie I, Horwarth D (2009) Die Krise but not La Crise? The financial crisis and the transformation of German and French banking systems. JCMS 47(5):1017–1039

    Google Scholar 

  • Hirshleifer D, Thakor A (1992) Managerial conservatism, project choice and debt. Rev Financ Stud 5:437–470

    Article  Google Scholar 

  • Holl D, Schertler A (2010) The liquidity regulation and savings banks’ liquid assets. Kredit Kap 43(4):533–558

    Article  Google Scholar 

  • Hüfner F (2010) The German banking system: lessons from the financial crisis. OECD Economics Department Working Papers. No. 788

  • Iannotta G, Nocera G, Sironi A (2007) Ownership structure, risk and performance in the European banking industry. J Bank Financ 31(7):2127–2149

    Article  Google Scholar 

  • Jensen M, Meckling WH (1976) Theory of the firm: managerial behavior, agency costs and ownership structure. J Financ Econ 3(4):305–360

    Article  Google Scholar 

  • Kirkpatrick G (2008) Corporate governance and the financial crisis. FINANCIAL MARKET TRENDS, OECD

  • Kwan S (2004) Risk and return of publicly held versus privately owned banks. Econ Policy Rev 10(2)

  • Laeven L, Levine R (2009) Bank governance, regulation and risk taking. J Financ Econ 93(2):259–275

    Article  Google Scholar 

  • Levine R (2004) Finance and growth: theory, evidence, and mechanisms. In: Aghion P, Durlauf S (eds) Handbook of economic growth. North-Holland Elsevier Publishers, Amsterdam

    Google Scholar 

  • Macey J, O’Hara M (2003) The corporate governance of banks. Econ Policy Rev 9(1)

  • Markowitz H (1952) The utility of wealth. Cowles Commission papers. New ser. no. 57

  • Morck R, Wolfenzon D, Yeung B (2005) Corporate governance, economic entrenchment, and growth. J Econ Lit 43(3):655–720

    Article  Google Scholar 

  • Pathan S (2009) Strong boards, CEO power and bank risk-taking. J Bank Financ 33(7):340–1350

    Article  Google Scholar 

  • Prowse S (1997) The corporate governance system in banking: what do we know? Bancadel Lavoro Q Rev 11–40

  • Saunders A, Strock E, Travlos NG (1990) Ownership structure, deregulation, and bank risk taking. J Finance 45(2):643–654

    Article  Google Scholar 

  • Schmielewski F (2012) Leveraging and risk taking within the German banking system: Evidence from the Financial Crisis in 2007 and 2008. Leuphana University Working Papers Series in Economics 228

  • Sharpe W (2007) Expected utility asset allocation. Financ Anal J 63(5):18–30

    Article  Google Scholar 

  • Sinclair-Desgagne B, Spaeter S (2011) The Prudent Principal. French National Center for Scientific Research (CNRS)—Bureau of Economic Theory and Application (BETA)

  • Stultz RM (2005) The limits of financial globalization. J Finance 60:1595–1638

    Article  Google Scholar 

  • Sullivan R, Spong K (2007) Corporate governance and bank performance. Federal Reserve Bank of Kansas City, Working Paper Series

Download references

Author information

Authors and Affiliations

  1. Leuphana University of Lüneburg, Lüneburg, Germany

    Frank Schmielewski & Thomas Wein

Authors
  1. Frank Schmielewski
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Thomas Wein
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Frank Schmielewski.

Appendix

Appendix

Fig. 1
figure 1

Indifference curves of principal and agents

Full size image
Fig. 2
figure 2

This figure illustrates the DD values of different ownership structures

Full size image
Table 1 This table shows our assessment of the capability of bank owners to monitor bank managers and the relevance of principal–agent problems assigned to the distinguishable ownership structures
Full size table
Table 2 This table shows our assessment of whether bank owners are equally risk-averse compared with bank managers (lower pooling capabilities [pp]) and whether managers have good chances of finding a new workplace (wp)
Full size table
Table 3 This table shows our assessment of whether bank owners have incentives to seek high returns
Full size table
Table 4 This table aggregates the relevance of principal–agent problems displayed in Tables 1, 2 and 3
Full size table
Table 5 CAR by principal
Full size table
Table 6 ROA by principal
Full size table
Table 7 DD by principal
Full size table
Table 8 Total assets by principal
Full size table
Table 9 DD from 2001 to 2009
Full size table
Table 10 Total assets from 2001 to 2009
Full size table
Table 11 This table illustrates our variables used for the descriptive statistics and OLS regressions
Full size table
Table 12 Assessment of German banking sectors
Full size table
Table 13 OLS regressions on percentiles of DD values (All regressions are examined using STATA 11.0 with default standard errors)
Full size table

Rights and permissions

Reprints and permissions

About this article

Cite this article

Schmielewski, F., Wein, T. Are private banks the better banks? An insight into the principal–agent structure and risk-taking behavior of German banks. J Econ Finan 39, 518–540 (2015). https://doi.org/10.1007/s12197-013-9266-y

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s12197-013-9266-y

Keywords

JEL Classification

Search

Navigation