Does the Impact of Board Independence on Large Bank Risks Change after the Global Financial Crisis?

Posted: 24 Mar 2017 Last revised: 26 Mar 2017

See all articles by Francesco Vallascas

Francesco Vallascas

University of Leeds - Division of Accounting and Finance

Sabur Mollah

Sheffield University Management School, University of Sheffield; Swansea Management School, Swansea University; Hull University Business School; Hull University Business School

Kevin Keasey

University of Leeds - Division of Accounting and Finance

Date Written: March 24, 2017

Abstract

The view that the independent directors of large banks should contribute to safeguarding the interests of bank creditors and taxpayers, by exercising a stringent risk oversight of bank executives, has gained ground in the aftermath of the 2007-2009 crisis. Using a cross-country sample of large banks for the period 2004-2014, we show that post 2009 an increase in board independence leads to more prudent bank risk-taking compared to the rest of the sample period. This effect materializes via independent boards favoring increases in bank capitalization and decreases in bank portfolio risk after the global crisis. Additional analyses demonstrate, however, that these results do not hold for all large banks in our sample but are confined to the group of banks benefiting from a government bailout during the crisis. In most large international banks board independence does not contribute to safeguarding the interests of bank creditors and taxpayers by constraining bank risk-taking.

Keywords: Bank Risk, Bank Governance, Board Independence, Regulation

JEL Classification: G21, G28

Suggested Citation

Vallascas, Francesco and Mollah, Sabur and Keasey, Kevin, Does the Impact of Board Independence on Large Bank Risks Change after the Global Financial Crisis? (March 24, 2017). Journal of Corporate Finance, 2017. Available at SSRN: https://ssrn.com/abstract=2940186

Francesco Vallascas

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

Leeds LS2 9JT
United Kingdom

Sabur Mollah (Contact Author)

Sheffield University Management School, University of Sheffield ( email )

Conduit Road
Sheffield, Sheffield S10 1FL
United Kingdom

Swansea Management School, Swansea University ( email )

Singleton Park
Swansea, Wales SA2 8PP
United Kingdom

Hull University Business School ( email )

Cottingham Road
Hull, Great Britain HU6 7RX
United Kingdom

Hull University Business School ( email )

Cottingham Road
Hull, Hull HU6 7RX
United Kingdom

Kevin Keasey

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

Leeds LS2 9JT
United Kingdom
+44 (0)113 343 2618 (Phone)

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