Does Better Governance Necessarily Reduce Financial Distress for European Banks?

Abstract

This paper empirically examines whether better governance necessarily reduces financial distress for banks. We have studied 49 banks among the TOP 100 European banks during the period 2006 to 2013 and performed a panel probit regression analysis on the financial distress dummy as our dependent variable using our selected governance, financial and economic explanatory variables. First, we found that governance determinants such as the independent Directors’ ratio or the number of board meetings per year do matter to explain bank distress, giving credence to the extent of increasing supervision and regulation. Second, we show that the Tier 1 capital ratio, the ROA and the price to book ratio that we initially identified to use as financial control variables for our regressions give significant results. Hence, we highlight the use of the Tier 1 capital ratio as a key regulatory capital adequacy ratio in the Risk Management departments of European banks.