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Bank owners or bank managers: who is keen on risk? Evidence from the financial crisis

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  • Gropp, Reint
  • Köhler, Matthias

Abstract

In this paper, we analyse whether bank owners or bank managers were the driving force behind the risks incurred in the wake of the financial crisis of 2007/2008. We show that owner controlled banks had higher profits in the years before the crisis, and incurred larger losses and were more likely to require government assistance during the crisis compared to manager-controlled banks. The results are robust to controlling for a wide variety of bank specific, country specific, regulatory and legal variables. Regulation does not seem to mitigate risk taking by bank owners. We find no evidence that profit smoothing drives our findings. The results suggest that privately optimal contracts aligning the incentives of management and shareholders may not be socially optimal in banks.

Suggested Citation

  • Gropp, Reint & Köhler, Matthias, 2010. "Bank owners or bank managers: who is keen on risk? Evidence from the financial crisis," ZEW Discussion Papers 10-013, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  • Handle: RePEc:zbw:zewdip:10013
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Nadia Saghi-Zedek & Amine Tarazi, 2015. "Droits de contrôle versus droits pécuniaires, crise financière et vulnérabilité des banques européennes," Revue économique, Presses de Sciences-Po, pages 527-535.
    2. Hendrik Hakenes & Isabel Schnabel, 2014. "Bank Bonuses and Bailouts," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(s1), pages 259-288, February.
    3. Eufinger, Christian & Gill, Andrej, 2013. "Basel III and CEO compensation in banks: Pay structures as a regulatory signal," SAFE Working Paper Series 9, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
    4. Westman, Hanna, 2014. "Crisis performance of European banks – does management ownership matter?," Research Discussion Papers 28/2014, Bank of Finland.
    5. Beltratti, Andrea & Stulz, René M., 2012. "The credit crisis around the globe: Why did some banks perform better?," Journal of Financial Economics, Elsevier, pages 1-17.
    6. Battaglia, Francesca & Gallo, Angela, 2017. "Strong boards, ownership concentration and EU banks’ systemic risk-taking: Evidence from the financial crisis," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 46(C), pages 128-146.
    7. Saghi-Zedek, Nadia & Tarazi, Amine, 2015. "Excess control rights, financial crisis and bank profitability and risk," Journal of Banking & Finance, Elsevier, vol. 55(C), pages 361-379.
    8. Bennett, Rosalind L. & Güntay, Levent & Unal, Haluk, 2015. "Inside debt, bank default risk, and performance during the crisis," Journal of Financial Intermediation, Elsevier, vol. 24(4), pages 487-513.
    9. Frank Schmielewski & Thomas Wein, 2015. "Are private banks the better banks? An insight into the principal–agent structure and risk-taking behavior of German banks," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 39(3), pages 518-540, July.
    10. Eufinger, Christian & Gill, Andrej, 2016. "Incentive-based capital requirements," SAFE Working Paper Series 9 [rev.], Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
    11. Byrd, John & Fraser, Donald R. & Scott Lee, D. & Tartaroglu, Semih, 2012. "Are two heads better than one? Evidence from the thrift crisis," Journal of Banking & Finance, Elsevier, vol. 36(4), pages 957-967.
    12. Frank Schmielewski & Thomas Wein, 2012. "Are private banks the better banks? An insight into the principal-agent structure and risk-taking behavior of German banks," Working Paper Series in Economics 236, University of Lüneburg, Institute of Economics.
    13. Tatom, John, 2010. "Financial Legislation: The Promise and Record of the Financial Modernization Act of 1999," MPRA Paper 24609, University Library of Munich, Germany.
    14. Vittoria Cerasi & Tommaso Oliviero, 2015. "CEO Compensation, Regulation, and Risk in Banks: Theory and Evidence from the Financial Crisis," International Journal of Central Banking, International Journal of Central Banking, vol. 11(3), pages 241-297, June.
    15. El Sood, Heba Abou, 2012. "Loan loss provisioning and income smoothing in US banks pre and post the financial crisis," International Review of Financial Analysis, Elsevier, vol. 25(C), pages 64-72.
    16. Chen, Hsiao-Jung & Lin, Kuan-Ting, 2016. "How do banks make the trade-offs among risks? The role of corporate governance," Journal of Banking & Finance, Elsevier, vol. 72(S), pages 39-69.

    More about this item

    Keywords

    Banks; risk taking; corporate governance; ownership structure; financial crisis;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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