Does Regulating Banks’ Corporate Governance Help? A Review of the Empirical Evidence

Abstract

The financial crisis of 2007–2008 fueled the idea that corporate governance in the financial sector urgently needed reform. The perception that poor corporate governance was a primary cause of the breakdown of the financial markets prompted extensive regulatory actions around the world. However, whether and how regulating banks’ corporate governance results in a better-functioning economy is a subject of ongoing debate. In this chapter we summarize the theoretical arguments for regulation and survey the empirical evidence on the role of corporate governance in the financial industry. The focus of our review is the post-crisis reform of banks’ corporate governance, as seen from a historical perspective. The discussion will be structured around the main corporate governance mechanisms, namely (i) internal governance mechanisms (i.e., managerial compensation, board monitoring, and internal control systems), (ii) market discipline (i.e., the roles of competition, the takeover market, and the shareholder activism), and (iii) regulatory intervention (i.e., capital requirements and regulatory supervision). Although a large part of the available evidence uses US data, our analysis also reviews corporate governance developments in important economies around the globe. We conclude by pointing out the limitations of empirical research in informing the debate on regulatory activity.