The Relationship Between Board of Directors’ Characteristics and Bank Risk-Taking: Evidence from Egyptian Banking Sector

Mohamed Galal Abobakr

doi:10.11648/j.jfa.20170501.13

Abstract

There is argument that the main reason behind the corporate failure is the engagement of banks in excessive risk taking. However, the existence literature provides conflicting evidence in this concern. The main objectives of this study is to investigate the influence of board characteristics on bank risk taking, by using Pooled Ordinary Least Squares regression techniques to test a sample of 27 Egyptian banks covering the period from 2006 to 2011. Measures of bank risk employed are the insolvency risk, credit risk and liquidity risk. The explanatory variables of board characteristics are board size, non-executive directors, CEO duality, female presence and, board qualifications. The control variables are bank size, debt ratio, and crisis. The results show that Board size is positively significant with the three measures of risks. Non-executive directors are negatively significant correlated with both insolvency and liquidity risk. CEO’s duality is found positively significant with credit risk. Board female is negatively significant with insolvency and liquidity risk, while it is positively significant with credit risk. Board qualifications have no effect on the three measures of risks. The findings support the idea that board of director's characteristics is a determinant factor for bank risk taking.

Highlights

The banking system stability is very important to the proper performing of the financial system and subsequently enhances the economic growth [14]
CAP mean is 9.47 percent, which is slightly lower than the percentage determined by The Central Bank of Egypt (CBE), which is 10 percent as a minimum capital ratio
This is consistent with studies found that large board size achieves higher insolvency risk and small board size aligns the interests between shareholders and managers resulting in a reduction of bank risks [23, 44]

Summary

Introduction

The banking system stability is very important to the proper performing of the financial system and subsequently enhances the economic growth [14]. Governments intervene and implement reforms and take corrective actions that bring the efficiency and stability to the financial system. This led regulators to conduct new cautious standards, in order to create healthier and stronger bank governance [10]. Recently a lot of effort exerted by academic and regulatory bodies to alleviate the bank risky behavior, especially after the 2008 financial crisis that affected most countries all over the world. Excessive bank risk-taking would damage the solidity of individual institutions, and the stability of the financial system as a whole [42]. The internal mechanisms of governance contribute effectively in improving bank governance and affect the bank risk [39]

Objectives

Results

Conclusion