The Roles of Corporate Governance in Bank Failures During the Recent Financial Crisis

43 Pages Posted: 15 Mar 2012 Last revised: 13 Oct 2014

See all articles by Allen N. Berger

Allen N. Berger

University of South Carolina - Darla Moore School of Business

Björn Imbierowicz

Deutsche Bundesbank - Research Centre

Christian Rauch

Umm Al Quwain University

Multiple version iconThere are 2 versions of this paper

Date Written: October 12, 2014

Abstract

This paper analyzes the roles of corporate governance in bank defaults during the recent financial crisis. We investigate the impacts of bank ownership and management structures on the probability of default of US commercial banks. Our results suggest that defaults are strongly influenced by a bank’s ownership structure: high shareholdings of lower-level management, such as vice presidents, increase default risk significantly. In contrast, shareholdings of outside directors and chief officers (managers with a “chief officer” position, such as the CEO, CFO, etc.) do not have a direct impact on the probability of failure. These findings suggest that high stakes in the bank induce lower-level management to take high risks due to moral hazard incentives, which may eventually result in bank default. Our results further show that the probability of default specifically increases when incentives of chief officers and lower-level management are aligned. Accounting variables, such as capital, earnings, and non-performing loans, also help predict bank default. However, other potential stability indicators, such as the management structure of the bank, appear to be less important.

Keywords: Bank Default, Corporate Governance, Bank Regulation

JEL Classification: G21, G28, G32, G34

Suggested Citation

Berger, Allen N. and Imbierowicz, Björn and Rauch, Christian, The Roles of Corporate Governance in Bank Failures During the Recent Financial Crisis (October 12, 2014). Available at SSRN: https://ssrn.com/abstract=2021799 or http://dx.doi.org/10.2139/ssrn.2021799

Allen N. Berger

University of South Carolina - Darla Moore School of Business ( email )

1014 Greene St.
Columbia, SC 29208
United States
803-576-8440 (Phone)
803-777-6876 (Fax)

Björn Imbierowicz

Deutsche Bundesbank - Research Centre ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Christian Rauch (Contact Author)

Umm Al Quwain University ( email )

Umm Al Quwain
United Arab Emirates

HOME PAGE: http://https://uaqu.ac.ae/

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