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Risk management, corporate governance, and bank performance in the financial crisis

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  • Aebi, Vincent
  • Sabato, Gabriele
  • Schmid, Markus
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    Abstract

    The recent financial crisis has raised several questions with respect to the corporate governance of financial institutions. This paper investigates whether risk management-related corporate governance mechanisms, such as for example the presence of a chief risk officer (CRO) in a bank’s executive board and whether the CRO reports to the CEO or directly to the board of directors, are associated with a better bank performance during the financial crisis of 2007/2008. We measure bank performance by buy-and-hold returns and ROE and we control for standard corporate governance variables such as CEO ownership, board size, and board independence. Most importantly, our results indicate that banks, in which the CRO directly reports to the board of directors and not to the CEO (or other corporate entities), exhibit significantly higher (i.e., less negative) stock returns and ROE during the crisis. In contrast, standard corporate governance variables are mostly insignificantly or even negatively related to the banks’ performance during the crisis.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 36 (2012)
    Issue (Month): 12 ()
    Pages: 3213-3226

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    Handle: RePEc:eee:jbfina:v:36:y:2012:i:12:p:3213-3226

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    Web page: http://www.elsevier.com/locate/jbf

    Related research

    Keywords: Chief risk officer; Corporate governance; Risk governance; Bank performance; Financial crisis;

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    Cited by:
    1. Schlüter, Tobias & Sievers, Sönke & Hartmann-Wendels, Thomas, 2012. "How can banks effectively stabilize their retail customers saving behavior? The impact of contractual rewards on saving persistence and cash flow volatility," Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 62057, Verein für Socialpolitik / German Economic Association.
    2. René M. Stulz, 2014. "Governance, Risk Management, and Risk-Taking in Banks," NBER Working Papers 20274, National Bureau of Economic Research, Inc.
    3. Eckles, David L. & Hoyt, Robert E. & Miller, Steve M., 2014. "The impact of enterprise risk management on the marginal cost of reducing risk: Evidence from the insurance industry," Journal of Banking & Finance, Elsevier, Elsevier, vol. 43(C), pages 247-261.
    4. Weiß, Gregor N.F. & Neumann, Sascha & Bostandzic, Denefa, 2014. "Systemic risk and bank consolidation: International evidence," Journal of Banking & Finance, Elsevier, Elsevier, vol. 40(C), pages 165-181.
    5. Cornett, Marcia Millon & Li, Lei & Tehranian, Hassan, 2013. "The performance of banks around the receipt and repayment of TARP funds: Over-achievers versus under-achievers," Journal of Banking & Finance, Elsevier, Elsevier, vol. 37(3), pages 730-746.
    6. von Meyerinck, Felix & Oesch, David & Schmid, Markus, 2012. "Is Director Industry Experience Valuable?," Working Papers on Finance 1217, University of St. Gallen, School of Finance.
    7. Amine Tarazi & Nadia Zedek, 2013. "Excess Control Rights, Financial Crisis and Bank Profitability and Risk," Working Papers hal-00916550, HAL.
    8. Constantin Zopounidis & Michael Doumpos, 2013. "Multicriteria decision systems for financial problems," TOP: An Official Journal of the Spanish Society of Statistics and Operations Research, Springer, Springer, vol. 21(2), pages 241-261, July.
    9. Dragos Ilie & Laura Ungureanu, 2014. "Survey on the Viewpoints of Credit Beneficiaries Qua Consumers in Order to increase Banking Accountability," The AMFITEATRU ECONOMIC journal, Academy of Economic Studies - Bucharest, Romania, vol. 16(35), pages 138, February.

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