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

48 Pages Posted: 18 Oct 2012  

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

University of Oxford - Said Business School

Multiple version iconThere are 2 versions of this paper

Date Written: July 2012

Abstract

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.

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 (July 2012). European Banking Center Discussion Paper No. 2012-023. Available at SSRN: https://ssrn.com/abstract=2163546 or http://dx.doi.org/10.2139/ssrn.2163546

Allen N. Berger (Contact Author)

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

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

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