Do economic freedom and board structure matter for bank stability and bank performance?

Christina Mavrakana and Maria Psillaki

MPRA Paper from University Library of Munich, Germany

Abstract: This paper investigates the effects of economic freedom, regulations and bank governance on bank performance and risk-taking in 18 European countries for the period 2004–2016. To this end, we use the Fraser economic freedom index and its sub-components namely credit, labor and business market regulation. Our results reveal that economic freedom increases bank performance and contributes to financial stability and soundness. Moreover, we show that liberal credit, labor and business regulation improves the profitability of banks and reduces risk-taking. Regarding the bank governance variables, we find that a large board increases the probability of default whilst the results are mixed for bank performance. Also, we show that experienced directors are associated with less risk-taking and better bank performance. The impact of female directors is positive on bank performance. Regarding the risk-taking of banks, we find that, in a liberal environment, women lead to less credit risk. Finally, the compensation of directors increases bank performance and reduces risk-taking. Our findings change depending on the time period and the location.

Keywords: Fraser economic freedom index; bank stability; regulation; bank governance; bank performance (search for similar items in EconPapers)
JEL-codes: G21 G28 P34 P51 (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-ban
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:95709

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