Did Strong Boards Affect Bank Tail Risk During the Financial Crisis? Evidence from European Countries

Abstract

Recent initiatives by banking supervisors, central banks and other authorities have emphasized the importance of corporate governance practices in banking sectors (see, e.g., Basel Committee on Banking Supervision, 2010; Board of Governors of the Federal Reserve System, 2010; OECD, Organization for Economic Cooperation and Development, 2010). The policy makers constantly — and with considerable effort since the subprime crisis broke out — try to improve current legislation to enable better monitoring of bank activities, including their risk-taking. It is widely recognized that the recent financial crisis is to a large extent attributable to excessive risk-taking by banks and that shortcomings in bank corporate governance may have had a central role in the development of the crisis. An OECD report argues that, ‘the financial crisis can be to an important extent attributed to failures and weaknesses in corporate governance arrangements’ (Kirkpatrick, 2009). Moreover, the crisis revealed the potential, underestimated consequences of unregulated systemic risk-taking by banks. As suggested by de Andres and Vallelado (2008), the main aim of regulators, which is to reduce systemic risk, might come into conflict with the main purpose of shareholders, which is to improve the share value by increasing their risk-taking. More recently, the National Commission on the Causes of the Financial and Economic Crisis in the United States concluded that, ‘dramatic failures of corporate governance…at many systematically important financial institutions were a key cause of this crisis’ (Beltratti and Stulz, 2011).