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Governance, crash risk, and systemic risk: evidence from large US banks

Author

Listed:
  • Michaël Dewally
  • Susan M.V. Flaherty
  • Yingying Shao

Abstract

This study investigates how the governance structure of bank holding companies (BHC) influences two types of market risks: crash risk and systemic risk. Using a sample of large BHC in the USA, we find limited evidence that high pay sensitivity is positively associated with banks' crash risk. In addition, high pay sensitivity and weak governance increase the systemic risk of banks. This study provides empirical support that governance decisions impact banks' risk exposure differently compared to those of corporate firms: 1) in opposite to the desired direction; 2) in conflicting manner. The study lends thus more credence to the recent call for redesigning the incentives and monitoring structure of banking industry. Our findings are important to regulators as they evaluate how best to intervene in the banking industry to forestall market contagion and failure. In particular, recent changes in capital requirements might not suffice to prevent future system shocks.

Suggested Citation

  • Michaël Dewally & Susan M.V. Flaherty & Yingying Shao, 2014. "Governance, crash risk, and systemic risk: evidence from large US banks," International Journal of Corporate Governance, Inderscience Enterprises Ltd, vol. 5(3/4), pages 133-155.
    • Handle: RePEc:ids:ijcgov:v:5:y:2014:i:3/4:p:133-155
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