Why Bank Governance is Different

Article in a refereed journal

Marco Becht, Patrick Bolton and Ailsa Roell, "Why Bank Governance is Different", Oxford Review of Economic Policy, vol. 27, n. 3, 2011, p. 437-463.

Abstract

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 multi-constituency 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.

JEL codes

G20: Financial Institutions and Services: General
G21: Banks; Depository Institutions; Micro Finance Institutions; Mortgages
G24: Investment Banking; Venture Capital; Brokerage; Ratings and Ratings Agencies
G28: Financial Institutions and Services: Government Policy and Regulation
G32: Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
G34: Mergers; Acquisitions; Restructuring; Voting; Proxy Contests; Corporate Governance

IAST Theme

Society, Globalization and Public Policy

IAST Discipline

Law
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