Download this Paper Open PDF in Browser

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

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

Allen N. Berger

University of South Carolina - Darla Moore School of Business; Wharton Financial Institutions Center; European Banking Center

Björn Imbierowicz

Copenhagen Business School

Christian Rauch

American University of Sharjah

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 )

1705 College St
Francis M. Hipp Building
Columbia, SC 29208
United States
803-576-8440 (Phone)
803-777-6876 (Fax)

Wharton Financial Institutions Center

Philadelphia, PA 19104-6367
United States

European Banking Center

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Björn Imbierowicz

Copenhagen Business School ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark
+4538153736 (Phone)

Christian Rauch (Contact Author)

American University of Sharjah ( email )

P.O. Box 26666
Sharjah
United Arab Emirates

Paper statistics

Downloads
1,448
Rank
5,000
Abstract Views
5,222