Abstract
Using agency theory, we explore the relationship between corporate governance mechanisms and bank risk. We employ panel data analysis to study the 97 largest European listed banks between 2006 and 2010, thereby covering the most recent international financial crisis. The results show that corporate governance mechanisms influence bank risk. During the financial crisis, different governance mechanisms can minimise or accentuate the agency conflict between shareholders and managers. In our model, bank size and G.D.P. per capita also exert a considerable influence.
Highlights
Studying the banking sector is relevant given its prominent role in modern economies
The banking sector is important in economies where banks play a central role in the financial system
We focus on the corporate governance factors that are adopted by banks, measure bank risk, and study the influence of corporate governance on bank risk
Summary
Studying the banking sector is relevant given its prominent role in modern economies. Pathan (2009) reports an agency problem between bank shareholders and debt-holders (mostly depositors) because of shareholders’ preference for ‘excessive risk’ This motivates our study of corporate governance amongst banks and, the influence on bank risk. Iannotta, Nocera, and Sironi (2007) performed an integrated analysis considering governance, ownership structure, risk and performance. Previous studies in this field (e.g., Pathan, 2009; Victoravich, Grove, Xu, & Bulepp, 2011) have focused on US financial institutions, where shareholder dispersion is the paradigm and banks play a less central role in the financial system than in, for example, continental European countries.
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