Advertisement

Did Strong Boards Affect Bank Tail Risk During the Financial Crisis? Evidence from European Countries

  • Francesca Battaglia
  • Angela Gallo
Part of the Palgrave Macmillan Studies in Banking and Financial Institutions book series (SBFI)

Abstract

Recent initiatives by banking supervisors, central banks and other authorities have emphasized the importance of corporate governance practices in banking sectors (see, e.g., Basel Committee on Banking Supervision, 2010; Board of Governors of the Federal Reserve System, 2010; OECD, Organization for Economic Cooperation and Development, 2010). The policy makers constantly — and with considerable effort since the subprime crisis broke out — try to improve current legislation to enable better monitoring of bank activities, including their risk-taking. It is widely recognized that the recent financial crisis is to a large extent attributable to excessive risk-taking by banks and that shortcomings in bank corporate governance may have had a central role in the development of the crisis. An OECD report argues that, ‘the financial crisis can be to an important extent attributed to failures and weaknesses in corporate governance arrangements’ (Kirkpatrick, 2009). Moreover, the crisis revealed the potential, underestimated consequences of unregulated systemic risk-taking by banks. As suggested by de Andres and Vallelado (2008), the main aim of regulators, which is to reduce systemic risk, might come into conflict with the main purpose of shareholders, which is to improve the share value by increasing their risk-taking. More recently, the National Commission on the Causes of the Financial and Economic Crisis in the United States concluded that, ‘dramatic failures of corporate governance…at many systematically important financial institutions were a key cause of this crisis’ (Beltratti and Stulz, 2011).

Keywords

Corporate Governance Independent Director Systemic Risk Board Size Board Meeting 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. Acerbi, C., C. Nordio and C. Sirtori (2001) Expected Shortfall as a Tool for Financial Risk Management, Preprint, Italy: Abaxbank.Google Scholar
  2. Acharya, V. and S. Stellen (2012) ‘Analyzing systemic risk of the European banking sector’, in J-P. Fouque and J. Langsam (eds), Handbook On Systemic Risk, Cambridge University Press.Google Scholar
  3. Acharya, V., L. Pedersen, T. Philippe and M. Richardson (2010) ‘Measuring systemic risk’, Technical Report, Department of Finance, NYU.CrossRefGoogle Scholar
  4. Adams, R. B. and D. Ferreira (2007) ‘A theory of friendly boards’, The Journal of Finance, 62, 217–250.CrossRefGoogle Scholar
  5. Adams, R.B. and H. Mehran (2012) ‘Bank board structure and performance: Evidence for large bank holding companies’, Journal of Financial Intermediation, 21, 243–267.CrossRefGoogle Scholar
  6. Akhigbe, A. and A.D. Martin (2008) ‘Influence of disclosure and governance on risk of US financial services firms following Sarbanes-Oxley’, Journal of Banking and Finance, 32, 2124–2135.CrossRefGoogle Scholar
  7. Baltagi, B. H. (2005) ‘Econometric Analysis of Panel Data, 3rd edition, Chichester, UK: John Wiley and Sons.Google Scholar
  8. Baltagi, B. H. and P.X. Wu (1999) ‘Unequally spaced panel data regressions with AR(1) disturbances’, Econometric Theory, 15, 814–823.CrossRefGoogle Scholar
  9. Bebchuk, L. and H. Spamann (2010) ‘Regulating banker’s pay’, Georgetown Law Journal, 98, 247–287.Google Scholar
  10. Beltratti, A. and R. Stulz (2011) ‘The credit crisis around the globe: Why did some banks perform better?’ Journal of Financial Economics, 105, 1–17.CrossRefGoogle Scholar
  11. Bhagat, S., and B. Black (2002) ‘The non-correlation between board independence and long-term firm performance’, Journal of Corporation Law, 27, 231–274.Google Scholar
  12. Basel Committee on Banking Supervision (2005) ‘International convergence of capital measurement and capital standards: A revised framework’, Discussion Paper, BIS Report, Basel, November.Google Scholar
  13. Basel Committee on Banking Supervision (2006) ‘Enhancing corporate governance for banking organizations’, Discussion Paper, BIS Report, Basel, July.Google Scholar
  14. Basel Committee on Banking Supervision (2010) ‘Principles for enhancing corporate governance’, BIS Report, Basel, February.Google Scholar
  15. Basel Committee on Banking Supervision (2013) ‘Global systemically important banks: Updated assessment methodology and the higher loss absorbency requirement’, BIS Report, Basel, July.Google Scholar
  16. Black, B.S., H. Jang and K. Woochan (2006) ‘Predicting firms’ corporate governance choices: Evidence from Korea’, Journal of Corporate Finance, 12, 660–691.CrossRefGoogle Scholar
  17. Board of Governors of the Federal Reserve System (2010) Bank Holding Company Supervision Manual, Supplement 38, July, Washington, D.C.Google Scholar
  18. Brownlees, C.T. and R.F. Engle R.F. (2010) Volatility, Correlation and Tails for Systemic Risk Measurement, Manuscript, Stern School of Business, New York University.Google Scholar
  19. Caprio, G. and R. Levine (2002) ‘Corporate governance in finance: Concepts and international observations’, in. Litan, R. E., M. Pomerleano and V. Sundararajan (eds), Financial Sector Governance: The Roles of the Public and Private Sectors, Washington, DC: The Brookings Institution, 17–50.Google Scholar
  20. Caprio, G., L. Laeven and R. Levine (2007) ‘Governance and bank valuation’, Journal of Financial Intermediation, 16, 584–617.CrossRefGoogle Scholar
  21. Casu, B., A. Clare, A. Sarkisyan and S. Thomas (2011) ‘Does securitization reduce credit risk taking? Empirical evidence from US bank holding companies’, European Journal of Finance, 17, 769–788.CrossRefGoogle Scholar
  22. Coles, J.L., D.D. Naveen and L. Naveen (2008) ‘Boards: Does one size fit all?’ Journal of Financial Economics, 87, 329–356.CrossRefGoogle Scholar
  23. Cornett, M., J.J. McNutt and H. Tehranian (2009) ‘Corporate governance and earnings management at large US bank holding companies’, Journal of Corporate Finance, 15, 412–430.CrossRefGoogle Scholar
  24. Cremers, K. and A. Ferrell (2010) ‘Thirty years of corporate governance. Firm valuation & stock returns’. Working Paper, Yale School of Management and Harvard Law School.Google Scholar
  25. De Andres, P. and E. Vallelado (2008) ‘Corporate governance in banking: The role of board of directors’, Journal of Banking and Finance, 32, 2570–2580.CrossRefGoogle Scholar
  26. De Jonghe, O. (2010) ‘Back to the basics in banking? A micro-analysis of banking system stability’, Journal of Financial Intermediation, 19, 387–417.CrossRefGoogle Scholar
  27. Diamond, D. and R.G. Rajan (2009) ‘The credit crisis: Conjectures about causes and remedies’, The American Economic Review, 99, 606–610.CrossRefGoogle Scholar
  28. Eisenberg, T., S. Sundgren and M.T. Wells (1998) ‘Larger board size and decreasing firm value in small firms’, Journal of Financial Economics, 48, 35–54.CrossRefGoogle Scholar
  29. Erkens, D., M. Hung and P. Matos (2012) ‘Corporate governance in the 2007–2008 financial crisis: Evidence from financial institutions worldwide’, Journal of Corporate Finance, 18, 389–411.CrossRefGoogle Scholar
  30. Glejser, H. (1969) ‘A new test for heteroskedasticity’, Journal of the American Statistical Association, 64, 316–323.CrossRefGoogle Scholar
  31. Fama, E.F. and M.C. Jensen (1983) ‘Separation of ownership and control’, Journal of Law and Economics, 26, 301–325.CrossRefGoogle Scholar
  32. Fernández, A. I., S. Gomez and C. Fernandez (1997) ‘The effect of board size and composition on corporate performance’, in Ballin, M. (ed.), Corporate Governance, Financial Markets and Global Convergence, Boston: Kluwer Academic Publishers.Google Scholar
  33. Francis, B., I. Hasan and Q. Wu (2012) ‘Do corporate boards affect firm performance? New evidence from the financial crisis’, Bank of Finland Research Discussion Papers, 11–2011.Google Scholar
  34. Fortin, R., G. Goldberg and G. Roth (2010) ‘Bank risk taking at the onset of the current banking crisis’, The Financial Review, 45, 891–913.CrossRefGoogle Scholar
  35. Hanazaki, M. and A. Horiuchi (2003) ‘A review of Japan’s bank crisis from the governance perspective’, Pacific-Basin Finance Journal, 11, 305–325.CrossRefGoogle Scholar
  36. Harris, M. and A. Raviv (2008) ‘A theory of board control and size’, The Review of Financial Studies, 2, 1797–1832.CrossRefGoogle Scholar
  37. Hermalin, B.E. and M.S. Weisbach (1991) ‘The effects of board composition and direct incentives on firm performance’, Financial Management, 20, 101–112.CrossRefGoogle Scholar
  38. Hermalin, B.E. and M.S. Weisbach (2003) ‘Board of directors as an endogenously determined institution: A survey of the economic literature’, FRBNY Economic Policy Review, 9, 7–26.Google Scholar
  39. Jiraporn, P. and P. Chintrakarn (2009) ‘Staggered boards, managerial entrenchment, and dividend policy’, Journal of Financial Services Research, 36, 1–19.CrossRefGoogle Scholar
  40. John, K. and L.W. Senbet (1998) ‘Corporate governance and board effectiveness’, Journal of Banking & Finance, 22, 371–403.CrossRefGoogle Scholar
  41. Kirkpatrick, G. (2009) ‘The corporate governance lessons from the financial crisis’, OECD Journal: Financial Market Frends, 1, 61–87.Google Scholar
  42. Knaup, N. and W. Wagner (2012) ‘Forward-looking tail risk exposure at U.S. bank holding companies’, Journal of Financial Services Research, 42, 35–54.CrossRefGoogle Scholar
  43. Laeven, L. and R. Levine (2009) ‘Bank governance, regulation and risk taking’, Journal of Financial Economics, 93, 259–275.CrossRefGoogle Scholar
  44. Levine, R. (2004) ‘The corporate governance of the banks: A concise discussion of concepts and evidence’, Working Paper, World Bank Policy Research.CrossRefGoogle Scholar
  45. Macey J. and M. O’Hara (2003) ‘The corporate governance of banks’, FRBNY Economic Policy Review, 4, 91–107.Google Scholar
  46. Mishra, C. and J. Nielsen (2000) ‘Board independence and compensation policies in large bank holding companies’, Financial Management, 29, 51–69.CrossRefGoogle Scholar
  47. OECD, Organisation for Economic Co-operation and Development (2010) ‘Corporate governance and the financial crisis: Conclusions and emerging good practices to enhance implementation of the principles’, OECD, Paris, February.Google Scholar
  48. Pacini, C. W. Hillison, D. Marlett and D. Burgess (2005) ‘Corporate governance and the market impact of the Financial Services Modernization act of 1999 on bank returns and trading volume’, Journal of Economics and Finance, 29, 46–72.CrossRefGoogle Scholar
  49. Pathan, S. (2009) ‘Strong boards, CEO power and bank risk-taking’, Journal of Banking and Finance, 33, 1340–1350.CrossRefGoogle Scholar
  50. Pathan, S. and R. Faff (2013) ‘Does board structure in banks really affect their performance?’ Journal of Banking and Finance, 37, 1573–1589.CrossRefGoogle Scholar
  51. Peni, E. and S. Vähämaa (2012) ‘Did good corporate governance improve bank performance during the financial crisis?’ Journal of Financial Service Research, 41, 19–35.CrossRefGoogle Scholar
  52. Sierra, G., E. Talmor and J. Wallace (2006) ‘An examination of multiple governance forces within bank holding companies’, Journal of Financial Services Research, 29, 105–123.CrossRefGoogle Scholar
  53. Vafeas, N. (1999) ‘Board meeting frequency and firm performance’, Journal of Financial Economics, 53, 113–142.CrossRefGoogle Scholar
  54. Webb Cooper E. (2009) ‘Monitoring and governance of private banks’, The Quarterly Review of Economics and Finance, 49, 253–264.CrossRefGoogle Scholar
  55. Wooldridge, J.M. (2002) Econometric Analysis of Cross Section and Panel Data, MIT Press Cambridge.Google Scholar
  56. Yermack, D. (1996) ‘Higher market valuation of companies with a small board of directors’, Journal of Financial Economics, 40, 185–211.CrossRefGoogle Scholar

Copyright information

© Francesca Battaglia and Angela Gallo 2014

Authors and Affiliations

  • Francesca Battaglia
  • Angela Gallo

There are no affiliations available

Personalised recommendations