Managerial ability as a tool for prudential regulation

Claudia Curi and Ana Lozano-Vivas

Journal of Economic Behavior & Organization, 2020, vol. 174, issue C, 87-107

Abstract: The new prudential regulation framework, established by the European Central Bank (ECB) after the financial crisis encompasses supervisory procedures to measure and monitor bank business models, capital requirements, governance arrangements and liquidity risk. However, research on financial stability has revealed that, during financial crises, it would have been essential to monitor the vulnerability of banks by also assessing the value of their intangible assets. We contribute to the extant literature by examining the impact of a specific intangible asset—namely, managerial ability—on bank risk-taking. Given the interest of the regulatory authority in monitoring financial stability, we quantify management ability and document its double effects on bank risk-taking: the indirect effect through franchise value and its direct effect. We examine a sample of listed banks from 15 EU countries over the period 1997–2016. We find that higher managerial ability is associated with higher franchise value, contributing to a decrease in bank risk-taking (indirect effect), particularly for small banks and during financial crisis. Moreover, managerial ability reduces bank risk-taking through its direct effect. Our evidence suggests that managerial ability could be considered a measure (easily estimated) for regulating the disciplinary role of franchise value and, used in combination with current regulatory measures, could lead to supervisors achieving more effective management oversight.

Keywords: Managerial ability; Franchise value; Risk; Financial stability; Regulation (search for similar items in EconPapers)
JEL-codes: G21 G28 G32 G38 M10 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:174:y:2020:i:c:p:87-107

DOI: 10.1016/j.jebo.2020.03.023

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