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Corporate Governance and Bank Insolvency Risk: International Evidence

Deniz Anginer (), Asli Demirguc-Kunt, Harry Huizinga and Kebin Ma

No 10185, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper finds that shareholder-friendly corporate governance is positively associated with bank insolvency risk, as proxied by the Z-score and the Merton’s distance to default measure, for an international sample of banks over the 2004-2008 period. Banks are special in that ‘good’ corporate governance increases bank insolvency risk relatively more for banks that are large and located in countries with sound public finances, as banks aim to exploit the financial safety net. ‘Good’ corporate governance is specifically associated with higher asset volatility, more non-performing loans, and a lower tangible capital ratio. Furthermore, ‘good’ corporate governance is associated with more bank risk taking at times of rapid economic expansion. Consistent with increased risk-taking, ‘good’ corporate governance is associated with a higher valuation of the implicit insurance provided by the financial safety net, especially in the case of large banks. These results underline the importance of the financial safety net and too-big-to-fail policies in encouraging excessive risk-taking by banks.

Keywords: Bank insolvency; Capitalization; Corporate governance; Non-performing loans (search for similar items in EconPapers)
JEL-codes: G21 M21 (search for similar items in EconPapers)
Date: 2014-10
New Economics Papers: this item is included in nep-ban and nep-rmg
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Related works:
Working Paper: Corporate Governance and Bank Insolvency Risk: International Evidence (2014) Downloads
Working Paper: Corporate Governance and Bank Insolvency Risk: International Evidence (2014) Downloads
Working Paper: Corporate Governance and Bank Insolvency Risk: International Evidence (2014) Downloads
Working Paper: Corporate governance and bank insolvency risk: international evidence (2014) Downloads
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