How do banks make the trade-offs among risks? The role of corporate governance

Chen, Hsiao-Jung; Lin, Kuan-Ting

doi:10.1016/j.jbankfin.2016.05.010

Cited by 53 publications

(39 citation statements)

References 88 publications

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“…This study is closely related to the works of Vallascas et al (2017), Battaglia and Gallo (2017), Chen and Lin (2016) analysing bank risk-taking and corporate governance. Vallascas et al (2017) use only board independence as the ratio between the number of independent directors and the total number of board members.…”

Section: Introductionmentioning

confidence: 78%

“…We employ the Z-score as a complex bank risk measure based on profitability and solvency. On the other hand, Chen and Lin (2016) verify the role of corporate governance in bank risk during the period of positive yield curve spreads (YCS), where a bank increases its profits by taking further interest rate risk, and during the inverted YCS period, where margins of banks narrow and even become negative. This study contributes to the literature attempts to identify the changes in mechanisms affecting the relationship between bank risk and corporate governance before and after the financial crisis of 2007-2009. Our study contributes to the existing literature by linking two groups of corporate governance standards (board structure and quality) and empirically examining whether and how the board's attributes can explain the changes in the solvency risk of financial institutions using an international sample of banks.…”

Section: Introductionmentioning

confidence: 90%

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The effect of corporate board attributes on bank stability

Karkowska

Acedański

2019

Port Econ J

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This study aims to empirically identify how a bank's board structure (size, independence, and members' affiliations) and quality (experience, background, and skills) affect its risk incentives. Specifically, it investigates whether banks' solvency and corporate governance nexus changed after the 2007-2009 financial crisis. We employ a cross-country sample of 239 commercial and publicly traded banks covering 1997-2016 and a panel regression for 40 countries. We acknowledge a negative relationship between board size and bank stability and demonstrate that an independent board may have constrained rather than encouraged risk in banks. The global financial crisis has not changed much in the corporate governance and stability of banks nexus. These findings are robust even while controlling for a range of alternative sensitivity estimations for bank stability. This result indicates that in the aftermath of the market meltdown, we still need to strengthen corporate governance practices which may mitigate the adverse effects of the crisis on the banking sector.

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Section: Introductionmentioning

confidence: 78%

Section: Introductionmentioning

confidence: 90%

The effect of corporate board attributes on bank stability

Karkowska

Acedański

2019

Port Econ J

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“…As indicated, there are two measures of SNCI, namely SNCI_log, and SNCI_logit. The variables of interest include BOD_size, BOD_ind, BOD_meeting, BOD_compensation, SC_size, SC_act.expertise, SC_meeting, and SC_compensation. We control for the effects of other variables that have been found in prior literature to affect the bank's risk (see Chen and Lin, 2016;Vallascas et al, 2017) -the natural log of total assets (ASSET), the natural log of bank age (AGE) and the country GDP growth (GDPGR). We argue that as bank size increases (ASSET), the banks' business operations will be more complex and the banks may need to put more effort into dealing with shariah non-compliant risk.…”

Section: Model Specificationmentioning

confidence: 99%

Corporate governance andShariahnon-compliant risk in Islamic banks: evidence from Southeast Asia

Basiruddin

Ahmed

2019

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Purpose This study aims to investigate the relationship between corporate governance and Shariah non-compliant risk (SNCR) that is unique for Islamic banks. The study examines the roles of Shariah committee along with the board of directors in mitigating SNCR. Design/methodology/approach The paper empirically investigates the implications of characteristics of board of directors and Shariah committee on the SNCR by using a sample of 29 full-fledge Islamic banks from Malaysia and Indonesia over the period 2007-2017. All data is hand collected from the Islamic banks' annual reports with the exception of country-level data collected from the World Bank database. Findings The results show that banks with a smaller board size and higher proportion of independent board members are likely to have lower SNCR. The findings also indicate that the financial expertise and higher frequency of Shariah committee meetings reduces the SNCR. Collectively, the analysis shows that banks with strong corporate governance environments reduce SNCR. Practical implications The findings of the study shed light on the relationship between corporate governance practice, Shariah committee characteristics and SNCR. The results can be used by different stakeholders such as policymakers, boards of directors and senior management of Islamic banks to mitigate SNCR. Originality/value This study extends the literature on corporate governance and risk-taking by including additional dimensions of governance and risk type. The corporate governance mechanism at the board level is complemented by including the Shariah committee characteristics and SNCR which is relevant to Islamic financial institutions is examined.

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“…Competent and effective risk oversight by the board of directors is critical to balancing agency conflicts (John & Senbet, ; O'Sullivan & Kinsella, 2011). Thus, boards require effective processes to carry out their responsibility of internal monitoring over this risk and reward trade‐offs (Chen & Lin, ; Ellul, ; Gontarek & Bender, ). While being regulated, banks are also subject to satisfying shareholder performance expectations, underscoring the need for a framework to balance risk‐related agency conflicts (de Andres & Valleldo, ; Maati & Maati‐Sauvez, ).…”

Section: Literature Reviewmentioning

confidence: 99%

“…Competent and effective risk oversight by the board of directors is critical to balancing agency conflicts (John & Senbet, 1998;O'Sullivan & Kinsella, 2011). Thus, boards require effective processes to carry out their responsibility of internal monitoring over this risk and reward trade-offs (Chen & Lin, 2016;Ellul, 2015;Gontarek & Bender, 2018).…”

Section: Risk Governancementioning

confidence: 99%

Risk governance: Examining its impact upon bank performance and risk‐taking

Gontarek

Belghitar

2018

Financial Market

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As policy‐makers in the United States contemplate a relaxation of financial regulation, our study contributes to this dialogue by testing the veracity of heightened standards of risk governance activities for US bank holding companies (BHCs). Our study examines evidence relating to the adoption of these standards by BHCs following regulatory intervention. We find that board‐level risk appetite practices have a profound association upon BHC performance and tail risk. Our estimates show that BHCs which adopt risk appetite practices exhibit a significant improvement in headline performance and reduced tail risk measures. Our research is relevant to academics by identifying the significance of this risk governance practice which has been introduced by global regulators. For practitioners (including board members, risk managers, policy‐makers and regulators), our study validates the efficacy of risk appetite frameworks as the future shape of financial regulation is being actively debated in the US.

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How do banks make the trade-offs among risks? The role of corporate governance

Cited by 53 publications

References 88 publications

The effect of corporate board attributes on bank stability

The effect of corporate board attributes on bank stability

Corporate governance andShariahnon-compliant risk in Islamic banks: evidence from Southeast Asia

Risk governance: Examining its impact upon bank performance and risk‐taking

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