Risky Lending: Does Bank Corporate Governance Matter?

50 Pages Posted: 20 Aug 2010 Last revised: 20 Aug 2015

See all articles by Olubunmi Faleye

Olubunmi Faleye

Northeastern University - Finance Group

Karthik Krishnan

Northeastern University

Date Written: August 15, 2015

Abstract

We study the effect of bank governance on risk-taking in commercial lending. Banks with more effective boards are less likely to lend to riskier borrowers. This effect is restricted to periods of distress in the banking industry. Banks with more effective boards are less likely to lend to riskier borrowers right after the Russian default, which led to exogenously imposed distress on U.S. banks. This relation is stronger at banks with board-level credit committees. Thus, value-maximizing banks may ration credit to riskier borrowers precisely when such firms might be credit-constrained, suggesting that bank governance regulations may have potential unintended consequences.

Keywords: Corporate Governance, Banking, Risky Lending

JEL Classification: G21, G34

Suggested Citation

Faleye, Olubunmi and Krishnan, Karthik, Risky Lending: Does Bank Corporate Governance Matter? (August 15, 2015). 23rd Australasian Finance and Banking Conference 2010 Paper. Available at SSRN: https://ssrn.com/abstract=1661837 or http://dx.doi.org/10.2139/ssrn.1661837

Olubunmi Faleye (Contact Author)

Northeastern University - Finance Group ( email )

Boston, MA 02115
United States

Karthik Krishnan

Northeastern University ( email )

360 Huntington Avenue
414C Hayden Hall
Boston, MA 02115
United States
617-373-4707 (Phone)

HOME PAGE: http://www.northeastern.edu/kkrishnan

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