The effect of corporate board attributes on bank stability

Renata Karkowska,Jan Acedański

doi:10.1007/s10258-019-00162-3

Renata Karkowska, Jan Acedański

Open Access

https://doi.org/10.1007/s10258-019-00162-3

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Abstract

This study aims to empirically identify how a bank’s board structure (size, independence, and members’ affiliations) and quality (experience, background, and skills) affect its risk incentives. Specifically, it investigates whether banks’ solvency and corporate governance nexus changed after the 2007–2009 financial crisis. We employ a cross-country sample of 239 commercial and publicly traded banks covering 1997–2016 and a panel regression for 40 countries. We acknowledge a negative relationship between board size and bank stability and demonstrate that an independent board may have constrained rather than encouraged risk in banks. The global financial crisis has not changed much in the corporate governance and stability of banks nexus. These findings are robust even while controlling for a range of alternative sensitivity estimations for bank stability. This result indicates that in the aftermath of the market meltdown, we still need to strengthen corporate governance practices which may mitigate the adverse effects of the crisis on the banking sector.

Highlights

In recent years, academic, regulatory and prudential policy studies have exhibited an increasing interest in the role of board governance for banking stability during a crisis (Basel Committee on Banking Supervision 2010; Battaglia and Gallo 2017; de Haan and Vlahu 2016; Iqbal et al 2015; Pathan and Faff 2013; Vallascas et al 2017)
It seems crucial to understand and discover whether and how the relation between banks’ board characteristics and their stability changed after the global financial crisis.The theoretical literature on the link between corporate governance in banks and their stability is indecisive; there is no scientific consensus on whether the board structure and experience lead to greater or lesser stability in the banking sector
Financial regulators have recently taken action to improve corporate governance practices in the banking system due to weaknesses in bank management that led to many bankruptcies

Summary

Introduction

Academic, regulatory and prudential policy studies have exhibited an increasing interest in the role of board governance for banking stability during a crisis (Basel Committee on Banking Supervision 2010; Battaglia and Gallo 2017; de Haan and Vlahu 2016; Iqbal et al 2015; Pathan and Faff 2013; Vallascas et al 2017). After the global financial crisis, it has been widely argued by banking supervisors and regulators that corporate governance can be considered as a mechanism for addressing stability problems and controlling risk within the bank. The problem of good practices in bank governance relates to agency problems caused by the separation of ownership and hired managers, who take investment risk without appropriate risk assessment and personal responsibility. They do not pay directly for the consequences of excessive risk (Rezaee 2008; Shleifer and Vishny 1997; Zagorchev and Gao 2015). It seems crucial to understand and discover whether and how the relation between banks’ board characteristics and their stability changed after the global financial crisis.The theoretical literature on the link between corporate governance in banks and their stability is indecisive; there is no scientific consensus on whether the board structure and experience lead to greater or lesser stability in the banking sector

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