Bank Owners or Bank Managers: Who is Keen on Risk? Evidence from the Financial Crisis

40 Pages Posted: 19 Feb 2010 Last revised: 28 Feb 2010

See all articles by Reint Gropp

Reint Gropp

Halle Institute for Economic Research

Matthias Köhler

Deutsche Bundesbank

Multiple version iconThere are 3 versions of this paper

Date Written: February 23, 2010

Abstract

In this paper, we analyse whether bank owners or bank managers were the driving force behind the risks incurred in the wake of the financial crisis of 2007/2008. We show that owner controlled banks had higher profits in the years before the crisis, and incurred larger losses and were more likely to require government assistance during the crisis compared to manager-controlled banks. The results are robust to controlling for a wide variety of bank specific, country specific, regulatory and legal variables. Regulation does not seem to mitigate risk taking by bank owners. We find no evidence that profit smoothing drives our findings. The results suggest that privately optimal contracts aligning the incentives of management and shareholders may not be socially optimal in banks.

Keywords: Banks, Risk Taking, Corporate Governance, Ownership Structure, Financial Crisis

JEL Classification: G21, G30, G34

Suggested Citation

Gropp, Reint and Köhler, Matthias, Bank Owners or Bank Managers: Who is Keen on Risk? Evidence from the Financial Crisis (February 23, 2010). European Business School Research Paper No. 10-02. Available at SSRN: https://ssrn.com/abstract=1555663 or http://dx.doi.org/10.2139/ssrn.1555663

Reint Gropp (Contact Author)

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

Matthias Köhler

Deutsche Bundesbank ( email )

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

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