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Corporate governance and bank risk-taking

Srivastav, Abhishek and Hagendorff, Jens 2016. Corporate governance and bank risk-taking. Corporate Governance: An International Review 24 (3) , pp. 334-345. 10.1111/corg.12133

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Abstract

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.

Item Type: Article
Date Type: Publication
Status: Published
Schools: Business (Including Economics)
Subjects: H Social Sciences > HG Finance
Uncontrolled Keywords: Corporate Governance; Banks; Board of Directors; CEO Pay; Risk Management
Publisher: Wiley Blackwell
ISSN: 0964-8410
Date of Acceptance: 22 August 2015
Last Modified: 04 Jun 2017 08:37
URI: http://orca.cf.ac.uk/id/eprint/81258

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