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Corporate Governance and Bank Insolvency Risk: International Evidence

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  • Anginer, Deniz
  • Demirguc-Kunt, Asli
  • Huizinga, Harry
  • Ma, Kebin

Abstract

This paper finds that shareholder-friendly corporate governance is positively associated with bank insolvency risk, as proxied by the Z-score and the Merton’s distance to default measure, for an international sample of banks over the 2004-2008 period. Banks are special in that ‘good’ corporate governance increases bank insolvency risk relatively more for banks that are large and located in countries with sound public finances, as banks aim to exploit the financial safety net. ‘Good’ corporate governance is specifically associated with higher asset volatility, more non-performing loans, and a lower tangible capital ratio. Furthermore, ‘good’ corporate governance is associated with more bank risk taking at times of rapid economic expansion. Consistent with increased risk-taking, ‘good’ corporate governance is associated with a higher valuation of the implicit insurance provided by the financial safety net, especially in the case of large banks. These results underline the importance of the financial safety net and too-big-to-fail policies in encouraging excessive risk-taking by banks.

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  • Anginer, Deniz & Demirguc-Kunt, Asli & Huizinga, Harry & Ma, Kebin, 2014. "Corporate Governance and Bank Insolvency Risk: International Evidence," CEPR Discussion Papers 10185, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:10185
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    Cited by:

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    2. Demirgüç-Kunt, Asli & Horváth, Bálint L. & Huizinga, Harry, 2017. "How does long-term finance affect economic volatility?," Journal of Financial Stability, Elsevier, vol. 33(C), pages 41-59.
    3. Rusmanto, Toto & Soedarmono, Wahyoe & Tarazi, Amine, 2020. "Credit information sharing in the nexus between charter value and systemic risk in Asian banking," Research in International Business and Finance, Elsevier, vol. 53(C).
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    5. Samar Jameel Kalyal & Dawood Ashraf & Asfia Obaid, 2019. "The Role of Stability and Ownership Structure in Determining the Efficiency of US Bank Holding Companies," Business & Economic Review, Institute of Management Sciences, Peshawar, Pakistan, vol. 11(2), pages 19-44, June.
    6. Horváth, Bálint L., 2020. "The interaction of bank regulation and taxation," Journal of Corporate Finance, Elsevier, vol. 64(C).
    7. Safiullah, Md & Shamsuddin, Abul, 2018. "Risk in Islamic banking and corporate governance," Pacific-Basin Finance Journal, Elsevier, vol. 47(C), pages 129-149.
    8. Bushman, Robert M., 2014. "Thoughts on financial accounting and the banking industry," Journal of Accounting and Economics, Elsevier, vol. 58(2), pages 384-395.
    9. René M. Stulz, 2015. "Risk-Taking and Risk Management by Banks," Journal of Applied Corporate Finance, Morgan Stanley, vol. 27(1), pages 8-18, March.
    10. Andrzej R. Stopczyński, 2020. "Banki na progu upadłości – refleksje nad postępowaniem," Bank i Kredyt, Narodowy Bank Polski, vol. 51(5), pages 517-548.

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    More about this item

    Keywords

    Bank insolvency; Capitalization; Corporate governance; Non-performing loans;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics

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