Authors: Panagiota Orfanakou, Evangelos Chytis

Title: Corporate Governance Mechanisms and Banking Risk

Abstract

The 2008 financial crisis highlighted the financial institutions’ weaknesses in the implementation of corporate governance and triggered significant regulatory reforms. Coordinated interventions which took place at a global level (OECD – Basel Committee), led to the establishment of new corporate governance obligations, recognizing at the same time their particular importance to the risk management function.

This paper assesses the level to which Greek banks have adapted to the principles and provisions of corporate governance, as well as its relation to bank risk.  It is worth noting that, although there is an extensive international research and bibliography on this specific subject, , no similar interest is identified  to date in Greece.

For this purpose, a unique database was created, which includes financial data as well as quality data of corporate governance. The data derived primarily from the annual and semi-annual financial statements of the four systemic banks and cover the period between 2012-2019, while for the calculation of banking risk, the methodology of Laeven & Levin (2009) was adopted.

The research concludes that Greek systemic Banks although exposed to significant risks, have at the same time obtained a satisfactory compliance level with the new corporate governance regulatory framework and continue to attribute increasing emphasis to risk management.

Following the variation analysis of banking risk in relation to the number of Board Members, and the percentage of shareholders holding over 5% of the Banks share capital, statistically significant differences occurred only in relation to the shareholders having more than 5%, and a smaller risk was demonstrated in cases where the percentage is less than 33.33%.

The paper is structured as follows: Initially, corporate governance principles and the relevant regulatory framework are presented. A bibliographical review and the calculation of bank risk (z-score) follows. Statistical data relating to banking risk and its relation with selected corporate governance indicators are then presented and analyzed. The paper ends with useful conclusions for the regulatory and supervisory authorities, financial markets as well as banking analysts. As a follow up to the research, its expansion to the overall banking sector, including the cooperative banks, is proposed.