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Why bank governance is different

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  • Marco Becht
  • Patrick Bolton
  • Ailsa Röell

Abstract

This paper reviews the pattern of bank failures during the financial crisis and asks whether there was a link with corporate governance. It revisits the theory of bank governance and suggests a multi-constituency approach that emphasizes the role of weak creditors. The empirical evidence suggests that, on average, banks with stronger risk officers, less independent boards, and executives with less variable remuneration incurred fewer losses. There is no evidence that institutional shareholders opposed aggressive risk-taking. The Financial Stability Board published Principles for Sound Compensation Practices in 2009, and the Basel Committee on Banking Supervision issued principles for enhancing corporate governance in 1999, 2006, and 2010. The reports have in common that shareholders retain residual control and executive pay continues to be aligned with shareholder interests. However, we argue that bank governance is different and requires more radical departures from traditional governance for non-financial firms. Copyright 2011, Oxford University Press.

Suggested Citation

  • Marco Becht & Patrick Bolton & Ailsa Röell, 2011. "Why bank governance is different," Oxford Review of Economic Policy, Oxford University Press, vol. 27(3), pages 437-463.
  • Handle: RePEc:oup:oxford:v:27:y:2011:i:3:p:437-463
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    File URL: http://hdl.handle.net/10.1093/oxrep/grr024
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    Cited by:

    1. Vittoria Cerasi & Tommaso Oliviero, 2014. "Managerial compensation, regulation and risk in banks: theory and evidence from the financial crisis," Working Papers 279, University of Milano-Bicocca, Department of Economics, revised Jul 2014.
    2. Ian P. Dewing & Peter O. Russell, 2016. "Whistleblowing, Governance and Regulation Before the Financial Crisis: The Case of HBOS," Journal of Business Ethics, Springer, vol. 134(1), pages 155-169, March.
    3. Akbar, Saeed & Kharabsheh, Buthiena & Poletti-Hughes, Jannine & Shah, Syed Zulfiqar Ali, 2017. "Board structure and corporate risk taking in the UK financial sector," International Review of Financial Analysis, Elsevier, vol. 50(C), pages 101-110.
    4. Anginer, Deniz & Demirguc-Kunt, Asli & Huizinga, Harry & Ma, Kebin, 2013. "How does corporate governance affect bank capitalization strategies ?," Policy Research Working Paper Series 6636, The World Bank.
    5. Anginer, Deniz & Demirguc-Kunt, Asli & Huizinga, Harry & Ma, Kebin, 2014. "Corporate governance and bank insolvency risk : international evidence," Policy Research Working Paper Series 7017, The World Bank.
    6. Liang, Hsin-Yu & Chen, I-Ju & Chen, Sheng-Syan, 2016. "Does corporate governance mitigate bank diversification discount?," International Review of Economics & Finance, Elsevier, vol. 45(C), pages 129-143.
    7. Garel, Alexandre & Petit-Romec, Arthur, 2017. "Bank capital in the crisis: It's not just how much you have but who provides it," Journal of Banking & Finance, Elsevier, vol. 75(C), pages 152-166.
    8. repec:bla:etrans:v:25:y:2017:i:3:p:377-437 is not listed on IDEAS
    9. repec:pal:jbkreg:v:18:y:2017:i:4:d:10.1057_s41261-016-0037-5 is not listed on IDEAS
    10. Rachdi Houssem & Trabelsi Mohamed Ali & Trad Naama, 2013. "Banking Governance and Risk: The Case of Tunisian Conventional Banks," Review of Economic Perspectives, De Gruyter Open, vol. 13(4), pages 195-206, December.
    11. Beatty, Anne & Liao, Scott, 2014. "Financial accounting in the banking industry: A review of the empirical literature," Journal of Accounting and Economics, Elsevier, vol. 58(2), pages 339-383.

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