The Roles of Corporate Governance in Bank Failures during the Recent Financial Crisis
Allen N. Berger
University of South Carolina - Moore School of Business; Wharton Financial Institutions Center; Tilburg University - CentER
Goethe University Frankfurt - Department of Finance
Goethe University Frankfurt
European Banking Center Discussion Paper No. 2012-023
This paper analyzes the roles of corporate governance in bank defaults during the recent financial crisis of 2007-2010. Using a data sample of 249 default and 4,021 no default US commercial banks, we investigate the impact of bank ownership and management structures on the probability of default. The results show that defaults are strongly influenced by a bank’s ownership structure: high shareholdings of outside directors and chief officers (managers with a “chief officer” position, such as the CEO, CFO, etc.) imply a substantially lower probability of failure. In contrast, high shareholdings of lower-level management, such as vice presidents, increase default risk significantly. These findings suggest that high stakes in the bank induce outside directors and upper-level management to control and reduce risk, while greater stakes for lower-level management seem to induce it to take high risks which may eventually result in bank default. Some 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, indicators of market competition, subprime mortgage risks, state economic conditions, and regulatory influences, do not appear to be decisive factors in predicting bank default.
Number of Pages in PDF File: 48
Keywords: Bank Default, Corporate Governance, Bank Regulation
JEL Classification: G21, G28, G32, G34working papers series
Date posted: October 18, 2012
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