Credit Booms and Busts in Emerging Markets: The Role of Bank Governance and Risk Management

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