Credit Booms and Busts in Emerging Markets: The Role of Bank Governance and Risk Management
42 Pages Posted: 19 Jan 2015 Last revised: 12 Feb 2017
Date Written: September 1, 2016
This paper investigates to what extent risk management and corporate governance mitigate the involvement of banks in credit boom and bust cycles. Using a unique, hand-collected dataset on 156 banks from Central and Eastern Europe during 2005-2012, we assess whether banks with stronger risk management and corporate governance display more moderate credit growth in the pre-crisis credit boom as well as a smaller credit contraction and fewer credit losses in the crisis period. With respect to bank governance we document that a higher share of financial experts on the supervisory board is associated with more rapid credit growth in the pre-crisis period and a larger contraction of credit in the crisis period, but not with larger credit losses. With respect to risk management we document that a strong risk committee is associated with more moderate pre-crisis credit growth but not with fewer credit losses in the crisis. We find no evidence of an organizational learning process among crisis-hit banks: those banks with the largest credit losses during the crisis are least likely to improve their risk management in the aftermath of the crisis.
Keywords: Credit boom and busts, corporate governance, risk management
JEL Classification: G21, G32, P34
Suggested Citation: Suggested Citation