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Why Bank Governance is Different

Marco Becht (), Patrick Bolton and Ailsa Roell

ULB Institutional Repository from ULB -- Universite Libre de Bruxelles

Abstract: This paper reviews the pattern of bank failures during the financial crisis and asks whether there was a link with corporate governance. It revisits the theory of bank governance and suggests a multi-constituency approach that emphasizes the role of weak creditors. The empirical evidence suggests that, on average, banks with stronger risk officers, less independent boards, and executives with less variable remuneration incurred fewer losses. There is no evidence that institutional shareholders opposed aggressive risk-taking. The Financial Stability Board published Principles for Sound Compensation Practices in 2009, and the Basel Committee on Banking Supervision issued principles for enhancing corporate governance in 1999, 2006, and 2010. The reports have in common that shareholders retain residual control and executive pay continues to be aligned with shareholder interests. However, we argue that bank governance is different and requires more radical departures from traditional governance for non-financial firms. © The Authors 2012. Published by Oxford University Press.

Keywords: Bailouts; Banking; Basel principles; Board composition; Commercial banks; Debt overhang; Deposit insurance; Financial expertise; Financial intermediation; Governance; Investment banks; Risk management; Risk taking (search for similar items in EconPapers)
Date: 2011
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Published in: Oxford review of economic policy (2011) v.27 n° 3,p.437-463

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