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Why Bank Governance is Different

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  • Marco Becht
  • Patrick Bolton
  • Ailsa Roell

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. © The Authors 2012. Published by Oxford University Press.

Suggested Citation

  • Marco Becht & Patrick Bolton & Ailsa Roell, 2011. "Why Bank Governance is Different," ULB Institutional Repository 2013/137433, ULB -- Universite Libre de Bruxelles.
  • Handle: RePEc:ulb:ulbeco:2013/137433
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    Cited by:

    1. Catarina Fernandes & Jorge Farinha & Francisco Vitorino Martins & Cesario Mateus, 2018. "Bank governance and performance: a survey of the literature," Journal of Banking Regulation, Palgrave Macmillan, vol. 19(3), pages 236-256, July.
    2. 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.
    3. 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.
    4. 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.
    5. Illiashenko, Pavlo & Laidroo, Laivi, 2020. "National culture and bank risk-taking: Contradictory case of individualism," Research in International Business and Finance, Elsevier, vol. 51(C).
    6. Gulati, Rachita & Kattumuri, Ruth & Kumar, Sunil, 2020. "A non-parametric index of corporate governance in the banking industry: An application to Indian data," Socio-Economic Planning Sciences, Elsevier, vol. 70(C).
    7. 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.
    8. Balachandran, Balasingham & Williams, Barry, 2018. "Effective governance, financial markets, financial institutions & crises," Pacific-Basin Finance Journal, Elsevier, vol. 50(C), pages 1-15.
    9. Zhou, Yifan & Kara, Alper & Molyneux, Philip, 2019. "Chair-CEO generation gap and bank risk-taking," The British Accounting Review, Elsevier, vol. 51(4), pages 352-372.
    10. Anginer, D. & Demirguc-Kunt, A. & Huizinga, H.P. & Ma, K., 2014. "Corporate Governance and Bank Insolvency Risk : International Evidence," Other publications TiSEM eaa7fe1c-5eb5-4c02-9508-8, Tilburg University, School of Economics and Management.
    11. 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.
    12. 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.
    13. Sylvia Maxfield & Liu Wang & Mariana Magaldi de Sousa, 2018. "The Effectiveness of Bank Governance Reforms in the Wake of the Financial Crisis: A Stakeholder Approach," Journal of Business Ethics, Springer, vol. 150(2), pages 485-503, June.
    14. Ibáñez-Hernández, Francisco J. & Peña-Cerezo, Miguel A. & Araujo-de-la-Mata, Andrés, 2019. "Corporate governance and procyclicality in a banking crisis: Empirical evidence and implications," Finance Research Letters, Elsevier, vol. 30(C), pages 271-275.
    15. Alin Marius Andries & Martin Brown, 2017. "Credit booms and busts in emerging markets," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 25(3), pages 377-437, July.
    16. Catarina Fernandes & Jorge Farinha & Francisco Vitorino Martins & Cesario Mateus, 2017. "Supervisory boards, financial crisis and bank performance: do board characteristics matter?," Journal of Banking Regulation, Palgrave Macmillan, vol. 18(4), pages 310-337, November.
    17. Papadimitri, Panagiota & Staikouras, Panagiotis & Travlos, Nickolaos G. & Tsoumas, Chris, 2019. "Punished banks' acquisitions: Evidence from the U.S. banking industry," Journal of Corporate Finance, Elsevier, vol. 58(C), pages 744-764.
    18. Ben Bouheni, Faten & Idi Cheffou, Abdoulkarim & Jawadi, Fredj, 2018. "Analyzing the governance structure of French banking groups," Research in International Business and Finance, Elsevier, vol. 44(C), pages 40-48.
    19. Marina Brogi & Valentina Lagasio, 2019. "Do bank boards matter? A literature review on the characteristics of banks' board of directors," International Journal of Business Governance and Ethics, Inderscience Enterprises Ltd, vol. 13(3), pages 244-274.
    20. Rachdi Houssem & Trabelsi Mohamed Ali & Trad Naama, 2013. "Banking Governance and Risk: The Case of Tunisian Conventional Banks," Review of Economic Perspectives, Sciendo, vol. 13(4), pages 195-206, December.
    21. Walter Gontarek & Ruth Bender, 2019. "Examining risk governance practices in global financial institutions: the adoption of risk appetite statements," Journal of Banking Regulation, Palgrave Macmillan, vol. 20(1), pages 74-85, March.
    22. Naif AlSagr & Samir Belkhaoui & Abdullah Aldosari, 2018. "The Effect of Corporate Governance Mechanisms on Bank Performance Evidence from Saudi Banking Sector," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 8(8), pages 1111-1125, August.
    23. 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.
    24. Anginer, Deniz & Demirguc-Kunt, Asli & Huizinga, Harry & Ma, Kebin, 2018. "Corporate governance of banks and financial stability," Journal of Financial Economics, Elsevier, vol. 130(2), pages 327-346.

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