Bank governance and performance: a survey of the literature (original) (raw)
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Why are banks special? An approach from the corporate governance perspective
… " Alexandru Ioan Cuza" din Iasi-Stiinte …, 2007
High standards in the governance of banks and firms are very important for economic growth. Banks have a critical position in the development of economies due to their major role in running the financial system. The banking industry is unique because it is simultaneously consolidating and diversifying. There is a significant public dimension to the banking firm; bank managers function in the light of two distinct sets of interests: one is the private interest, internal to the firm, and the other is the public interest, external to the firm. Previous literature analyses the implications of banks' specific attributes on their corporate governance framework. It emphasises two major aspects: greater opaqueness and greater regulation. Whether these attributes have a weakening effect on the traditional corporate governance mechanism is a matter debated by most research papers on the subject. This study is done on the specific characteristics of banks from the point of view of current economic framework, and the implications of these characteristics on the governance of banks. This paper analyses the environment with increased regulation of the banking firm, as a governance control mechanism.
Oxford Handbooks Online, 2016
According to a common narrative, the failure of banks in the financial crisis reflected poor corporate governance practices, as well as inadequate prudential regulatory safeguards. Yet it turns out that the “best” governance practices according to ordinary standards were the ones that did worst during the financial crisis. In the period leading up to the financial crisis, it was believed that regulation would cause banks to internalize the costs of their activities, meaning that what maximized bank shareholders’ returns would also be in the interests of society. Consequently, large banks used the same governance tools as non-financial companies to minimize shareholder-management agency costs, namely independent boards, shareholder rights, the shareholder primacy norm, the threat of takeovers, and equity-based executive compensation. Unfortunately, such tools had the adverse effect of encouraging bank managers to take excessive risks. Consequently, a significant rethink about the way...
Corporate governance in the banking sector
Performance, Risk and Competition in the Chinese Banking Industry, 2014
Corporate governance is an important topic in all kinds of companies and has attracted attention from government, company directors, stakeholders, and academic researchers. Appropriate development of the relationship between company and different stakeholders, which is addressed by corporate governance, is supposed to promote improvements in firm performance. Banks, as important financial institutions, play important roles in a country's economy. They deal with the relationship between management and different shareholders as well as depositors. There are different interpretations of the meaning of corporate governance. The chapter begins by defining corporate governance. This is followed by a section entitled ''Theories relevant to corporate governance''. There then follow sections entitled ''Corporate governance problems of banks'' and ''Bank corporate governance in practice''. The chapter ends with a conclusion.
Bank Corporate Governance: Failures and Reforms
Bank Corporate Governance: Failures and Reforms, 2019
Bank corporate governance has become a heated topic of discussion since the great depression of 1929 because of the unique nature of banking business. After the recent Global Financial Crisis of 2008 (GFC), evidence of the systematic effects of bank practices has been widespread in the global economy. Traditionally, banks have had a bad reputation of handling investor and depositor funds and it was an eventuality that they would become a scapegoat to the crisis. Questions on bank governance resonated throughout economies around the world and people through their legislative representatives sought to revisit bank governance and regulation as this was a sequel to the great depression of 1929. This thesis provides some answers on the current state of bank corporate governance by primarily focusing on the fundamental contribution of corporate governance in the financial crisis. It identifies key failures and proves that failure in bank corporate governance played a significant contributory role in the financial crisis. It also shows that systematic risk and the interconnection of the global financial market amplified this failure by highlighting its complex and problematic nature. This Thesis bases its argument on existing empirical evidence and analyses them across the background of corporate governance mechanisms and legislations governing banks in the EU and the US. This thesis finds that weak corporate governance structures contributed to the failure of major banks and the subsequent collapse of economies around the world. It identifies systematic risk, risk management, executive compensation the agency problem and cumulation of these issues that is the moral hazard problem as the key failures in bank corporate governance. It concludes that there is room for improvement in terms of reform and regulators, should avoid reactionary legislative measures and adopt a progressive means of addressing bank corporate governance issues such as systematic risk and the moral hazard problem rather than using reactionary legislation. This thesis reasons that banking practices are unique and issues with their governance structure should be addressed from a different perspective.
Corporate Governance of Banks & the Financial Crisis
2013
This paper elaborates on the corporate governance of banks and its role in the recent financial crisis. While banks' corporate governance nowadays is largely focused on the interests of shareholders, this paper investigates whether banks’ corporate governance should not be more oriented to the interests of the several other stakeholders that banks have. It starts by elaborating on the differences between banks and non-financial companies. These differences might give rise to specific corporate governance problems, for example the moral hazard problem which is present in banks due to their structure and the high degree of possible governmental intervention. Then, the specific role of the corporate governance of banks (more specifically, the incentivizing remuneration schemes and the excessive risk-taking) in the recent financial crisis is elaborated upon. Thereafter, a critical review of certain post-crisis proposals (e.g. say-on-pay-regulations) is given. Finally, this paper pro...
Why bank governance is different
This paper reviews the pattern of bank failures during the financial crisis and asks whether there was a link with corporate governance. It revisits the theory of bank governance and suggests a multiconstituency approach that emphasizes the role of weak creditors. The empirical evidence suggests that, on average, banks with stronger risk officers, less independent boards, and executives with less variable remuneration incurred fewer losses. There is no evidence that institutional shareholders opposed aggressive risk-taking. The Financial Stability Board published Principles for Sound Compensation Practices in 2009, and the Basel Committee on Banking Supervision issued principles for enhancing corporate governance in 1999, 2006, and 2010. The reports have in common that shareholders retain residual control and executive pay continues to be aligned with shareholder interests. However, we argue that bank governance is different and requires more radical departures from traditional governance for non-financial firms.
Corporate Governance in Banking: A Conceptual Framework
SSRN Electronic Journal, 2000
In the wake of far reaching financial system reforms, almost three fourths of the member countries of the IMF experienced significant episodes of systemic crisis and associated bank failures. Notably absent in the ensuing debates on the correlation between financial system reforms and systemic crisis was discussion of corporate governance in the affected banks and the role it may have played in the provoking financial crisis. Consideration of corporate governance in banks is, however, apparently easier said than done. While there is a great deal of empirical research on corporate governance, very little of it concerns the behaviour of owners and managers of banks; all of it assumes that banks conform to the concept of the firm used in Agency Theory. The aim of this paper is to demonstrate the limitations of that assumption and to propose an alternative conceptual framework more suitable to its analysis. We argue that commercial banks are distinguished by a more complex structure of information asymmetry arising from the presence of regulation. We show how regulation limits the power of markets to discipline the bank, its owners and its managers and argue that regulation must be seen as an external force, which alters the parameters of governance in banks.
2015
In the context of the financial market volatility and economic competitiveness, corporate governance has become an imperative for improving organizational performance and a strategic instrument for enhancing credibility of stakeholders in companies and institutions. Evidence show that at present, banks continue to have a governance problem, which poses significant risks not just to them, but potentially to the entire economy (Forth, 2012). Corporate governance is essentially important for banks, because such institutions: (a) deal with funds raised from the public; (b) are likely to encounter greater risks including frauds and failure; and (c) if such frauds or failures occur in such institutions, it may pose issues relating to public confidence in the financial system stability itself (Cabraal, 2007, p.3). The purpose of our empitical study is to analyze the corporate governance framework of the banks listed at Bucharest Stock Exchange, in terms of: principles and practices of corp...