Corporate Governance and Bank Risk‐Taking

12 Pages Posted: 25 Apr 2016

See all articles by Abhishek Srivastav

Abhishek Srivastav

University of Leeds - Division of Accounting and Finance

Jens Hagendorff

University of Edinburgh - Business School

Date Written: May 2016

Abstract

Manuscript type. Review.

Research Question/Issue. Bank governance has become the focus of a flurry of recent research and heated policy debates. However, the literature presents seemingly conflicting evidence on the implications of governance for bank risk‐taking. The purpose of this paper is to review prior work and propose directions for future research on the role of governance on bank stability.

Research Findings/Insights. We highlight a number of key governance devices and how these shape bank risk‐taking: the effectiveness of bank boards, the structure of CEO compensation, and the risk management systems and practices employed by banks.

Theoretical/Academic Implications. Prior work primarily views bank governance as a mechanism to protect the interests of bank shareholders only. However, given that taxpayer‐funded guarantees protect a substantial share of banks’ liabilities and that banks are highly leveraged, shareholder‐focused governance may well subordinate the interests of other stakeholders and exacerbate risk‐taking concerns in the banking industry. Our review highlights the need for internal governance mechanisms to mitigate such behavior by reflecting the needs of shareholders, creditors, and the taxpayer.

Practitioner/Policy Implications. Our review argues that the relationship between governance and risk is central from a financial stability perspective. Future research on issues highlighted in the review offer a footing for reforming bank governance to constrain potentially undesirable risk‐taking by banks.

Keywords: Corporate Governance, Banks, Board of Directors, CEO Pay, Risk Management

Suggested Citation

Srivastav, Abhishek and Hagendorff, Jens, Corporate Governance and Bank Risk‐Taking (May 2016). Corporate Governance: An International Review, Vol. 24, Issue 3, pp. 334-345, 2016, Available at SSRN: https://ssrn.com/abstract=2769040 or http://dx.doi.org/10.1111/corg.12133

Abhishek Srivastav (Contact Author)

University of Leeds - Division of Accounting and Finance ( email )

Leeds LS2 9JT
United Kingdom

Jens Hagendorff

University of Edinburgh - Business School ( email )

University of Edinburgh
29 Buccleuch Place
Edinburgh, Scotland EH8 9JS
UNITED KINGDOM

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