Governance, crash risk, and systemic risk: evidence from large US banks

Michaël Dewally, Susan M.V. Flaherty and Yingying Shao

International Journal of Corporate Governance, 2014, vol. 5, issue 3/4, 133-155

Abstract: This study investigates how the governance structure of bank holding companies (BHC) influences two types of market risks: crash risk and systemic risk. Using a sample of large BHC in the USA, we find limited evidence that high pay sensitivity is positively associated with banks' crash risk. In addition, high pay sensitivity and weak governance increase the systemic risk of banks. This study provides empirical support that governance decisions impact banks' risk exposure differently compared to those of corporate firms: 1) in opposite to the desired direction; 2) in conflicting manner. The study lends thus more credence to the recent call for redesigning the incentives and monitoring structure of banking industry. Our findings are important to regulators as they evaluate how best to intervene in the banking industry to forestall market contagion and failure. In particular, recent changes in capital requirements might not suffice to prevent future system shocks.

Keywords: corporate governance; compensation; systemic risk; crash risk; large banks; USA; United States; bank holding companies; BHC; market risks; risk exposure; incentives; bank monitoring; banking industry; market contagion; bank failure. (search for similar items in EconPapers)
Date: 2014
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