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

See all articles by Alin Marius Andries

Alin Marius Andries

Alexandru Ioan Cuza University - Faculty of Economics and Business Administration

Martin Brown

University of St. Gallen

Date Written: September 1, 2016

Abstract

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

Andries, Alin Marius and Brown, Martin, Credit Booms and Busts in Emerging Markets: The Role of Bank Governance and Risk Management (September 1, 2016). University of St. Gallen, School of Finance Research Paper No. 2014/14; 28th Australasian Finance and Banking Conference. Available at SSRN: https://ssrn.com/abstract=2551712 or http://dx.doi.org/10.2139/ssrn.2551712

Alin Marius Andries

Alexandru Ioan Cuza University - Faculty of Economics and Business Administration ( email )

Bd. Carol I no.22
Iasi, RO-700505
Romania

Martin Brown (Contact Author)

University of St. Gallen ( email )

Unterer Graben 21
St. Gallen, CH-9000
Switzerland

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