Abstract
This paper investigates whether bank corporate governance can play a role in the aggregate risk score assigned to individual banks by regulators. We exploit regulatory changes at the European level and a fixed-effects model to reduce endogeneity issues. We contribute to the existing literature on bank corporate governance by showing that board age significantly increases bank risk. This may indicate that boards formed by older members are more entrenched and can also be less dynamic. Board size and gender composition of the board are risk-neutral.
Highlights
In recent years, corporate governance issues have received increased attention from various international bodies
We find no evidence that board size and board gender composition impact bank risk
In the last few years, the Eurozone banking sector has continued to reduce its level of risk, benefitting from the positive macroeconomic developments in most euro area countries and from the implementation of several reforms both at the European Union (EU) and national levels
Summary
Corporate governance issues have received increased attention from various international bodies. As highlighted by the Group of Thirty (2012), weaknesses in bank corporate governance mechanisms are thought to have played a vital role during the global financial crisis (GFC) in promoting bank risk-taking. The finding that corporate governance has implications for bank stability was already established long before the global financial crisis (Saunders, Strock, & Travlos, 1990; Gorton & Rosen, 1995; Anderson & Fraser, 2000). The global financial crisis brought attention, both in academic and policy circles, back the role of bank corporate governance structures for financial stability. Recent literature investigates the impact of corporate governance on bank risk-taking (Caprio, Laeven, & Levine, 2007; Laeven & Levine, 2009; Pathan, 2009; DeYoung, Peng, & Yan, 2013). Recent academic work aims at identifying the most efficient bank governance structures (Adams & Mehran, 2012; Beltratti & Stulz, 2012; Mehran, Morrison, & Shapiro, 2011)
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