Banks’ Interactions with Listed Non-Financial Firms as a Determinant of Corporate Governance in Banking: An Agency Theory Analysis

Banking regulation, including corporate governance in banking, needs to strike a balance between the costs and benefits of regulatory intervention. This chapter aims at extending the theoretical base for the cost-benefit trade-off in bank governance regulation by providing a law and economics framework of how banks interact with listed non-financial firms in view of the modern financial intermediation literature. To this end, the chapter first takes up a qualitative analysis of the tension underlying governance regulation of banks by referring to the post-crisis regulatory measures in the European Union as an example. Subsequently, the chapter uses agency theory to investigate banks’ roles for corporate governance of listed non-financial firms. Three qualitative case studies are presented, revealing that banks’ influence over non-financial firms appears to be more multidimensional than commonly considered in the literature. Specifically, it is shown that bank monitoring and control can present opportunities as well as challenges for listed non-financial firms by affecting their governance arrangements with implications ranging from day-to-day business operations to fundamental capital market transactions in addition to the distress context. The chapter also discusses the implications of differences in ownership structures and identifies possibilities of bank influence both in concentrated and dispersed ownership contexts. Overall, the findings of this chapter contribute to the debate on the effectiveness of corporate governance in banking by bringing in a largely neglected dimension into the picture and establishing a theoretical basis for an improved balancing act in policymaking.