Risk Management, Corporate Governance, and Bank Performance in the Financial Crisis

45 Pages Posted: 13 Oct 2011  

Markus M. Schmid

University of St. Gallen - Swiss Institute of Banking and Finance; University of St. Gallen - School of Finance

Gabriele Sabato

Risk Management

Vincent Aebi

University of St. Gallen

Date Written: October 11, 2011

Abstract

The recent financial crisis has raised several questions with respect to the corporate governance of financial institutions. This paper investigates whether risk management-related corporate governance mechanisms, such as for example the presence of a chief risk officer (CRO) in a bank’s executive board and whether the CRO reports to the CEO or directly to the board of directors, are associated with a better bank performance during the financial crisis of 2007/2008. We measure bank performance by buy-and-hold returns and ROE and we control for standard corporate governance variables such as CEO ownership, board size, and board independence. Most importantly, our results indicate that banks, in which the CRO directly reports to the board of directors and not to the CEO (or other corporate entities), exhibit significantly higher (i.e., less negative) stock returns and ROE during the crisis. In contrast, standard corporate governance variables are mostly insignificantly or even negatively related to the banks’ performance during the crisis.

Keywords: Chief risk officer, Corporate governance, Risk governance, Bank performance, Financial Crisis

JEL Classification: G01, G21, G32, G34

Suggested Citation

Schmid, Markus M. and Sabato, Gabriele and Aebi, Vincent, Risk Management, Corporate Governance, and Bank Performance in the Financial Crisis (October 11, 2011). Available at SSRN: https://ssrn.com/abstract=1942896 or http://dx.doi.org/10.2139/ssrn.1942896

Markus M. Schmid (Contact Author)

University of St. Gallen - Swiss Institute of Banking and Finance ( email )

Rosenbergstrasse 52
St. Gallen, 9000
Switzerland

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Gabriele Sabato

Risk Management ( email )

280 Bishopsgate
London, EC2M 4RB
United Kingdom
+447902992330 (Phone)

Vincent Aebi

University of St. Gallen ( email )

University of St. Gallen
Swiss Institute of Banking and Finance
St. Gallen, SG 9000
Switzerland

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