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Corporate governance and financial stability in US banks: Do indirect interlocks matter?

Roba Ashraf Abdelbadie and Aly Salama

Journal of Business Research, 2019, vol. 104, issue C, 85-105

Abstract: In the context of the Depository Institution Management Interlocks Act of 1978 (Interlocks Act), we investigate the structure and implications of the professional connections among bank directors. Based on a hand-collected unique dataset for a sample of 168 US commercial banks listed continuously from 2009 to 2015, we find that the barriers set out in the Interlocks Act have been circumvented by the establishment of indirect interlocks that allow for mass professional connections among bank directors. Our evidence suggests that bank well-connectedness through indirect interlocks has a significant impact on financial stability. In particular, we find, in support of the extended resource-based view (RBV), that well-connected banks mitigate their credit and insolvency risks but, contrary to our expectation, lower bank capitalisation. Our evidence suggests that the Interlocks Act and bank governance reforms need to consider the role of professional communications among bank directors to fully achieve their intended goals.

Keywords: Board governance; Bank financial stability; Indirect interlocks; Resource-based view (RBV); US banking sector (search for similar items in EconPapers)
JEL-codes: C36 G21 G28 G32 G34 G32 K21 L41 (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbrese:v:104:y:2019:i:c:p:85-105

DOI: 10.1016/j.jbusres.2019.06.047

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