Hellenic Open University Conferences, International Conference on Business & Economics of the Hellenic Open University 2017

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Does board structure matter for bank stability?
Xristina Mavrakana, Maria Psillaki

##manager.scheduler.building##: Titania
##manager.scheduler.room##: Niki
Date: 2017-04-21 04:30 PM – 06:30 PM
Last modified: 2017-04-11

Abstract


The global financial crisis that erupted in 2007 has questioned the effectiveness of corporate governance mechanisms and board effectiveness in the banking industry. The poor performance of many banks has often been related to poor governance practices and the failure of board directors to perform in the best interest of stakeholders (Aebi et al 2012, Beltratti and Stulz 2012). A typical example is a statement by the Organisation for Economic Co-operation and Development (OECD 2009) argues that the wrong decisions of the Executive Board contributed to deregulation of banks and risk management weakness (Minguez and Campbell 2010).

The aim of our paper is to examine whether board structure according to different determinants and socioeconomic characteristics such as board size, independence, gender diversity and financial experience affect risk taking and if there are changes before, during and after the period of global financial crisis.

This is the first study to our knowledge to investigate the relationship between the corporate governance system (Tier 1 and/or Tier 2) and bank risk taking. For instance examining the effect of executive board composition on risk taking in the context of a two-tier or one-tier system offers the benefit of a clear distinction between inside directors and outside directors, important to explain changes in banks’ risk.

The prior studies were examining banks either in a global scale or in US country only. Yet there are few kinds of literature discussed the same issue for banks in Europe. Given the fact that Europe as the one of the largest economy in the world its financial instructions were also seriously affected by the global crisis of 2008 which stimulates the re-thinking of bank corporate governance for the particular zone. In this way, our paper extends the previous research focused on the United States on the impact of board structure on bank performance by using data from European countries with different supervision and legislation systems that on the United States. More precisely, we construct a sample of commercial banks and bank holding companies from 20 different OECD countries for the period 2004-2015.

In terms of methodology, this study contributes to the literature by checking the robustness of the findings by using different measures of bank performance and several estimation methods to control for unobserved heterogeneity, simultaneity and reserve causality. To do so we use two-step Generalized Method of Moments (GMM) to face the problem of endogeneity. This method is suitable for estimating a dynamic model when it is difficult to find orthogonal instruments to reduce the endogeneity problem in governance variables like board size and independence. By examining the relationship between board composition and bank risk taking we provide new evidence of the importance of board structure on risk by considering both socioeconomic and bank characteristics.


Keywords


board structure, bank stability, corporate governance

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