Déjà Vu: The Effect of Executives and Directors with Prior Banking Crisis Experience on Bank Outcomes Around the Global Financial Crisis

Abstract

We investigate the effect of executives and directors with prior banking crisis experience on bank outcomes around the global financial crisis (GFC). Banks led by individuals with previous experience leading banks through a bank crisis may have been uniquely able to understand the risks, recognize the warnings signs early, and thus more effectively respond to the GFC. Controlling for other executive, director, and bank-level characteristics, we examine whether bank performance, risk taking, and accounting quality in the period immediately before and during the GFC are affected by having executives or directors who previously served as bank executives or directors during the 1980s/1990s banking crisis (80s/90s crisis). Overall, we find that banks led by these crisis-experienced executives and directors exhibit stronger performance, lower risk taking, and higher accounting quality in the period immediately before and during the GFC. These effects are strongest among bank leaders for whom the 80s/90s crisis was most salient. Results are robust to propensity matched samples and other analyses performed to rule out alternative explanations. Our results suggest these individuals were able to learn from prior crisis experience.

Keywords: governance, banking, learning, financial crisis, bank performance, bank risk-taking, bank financial reporting quality