Corporate governance structure and capital adequacy: implications to bank risk taking
Abstract
Purpose
The purpose of this paper is to show the importance of policy discussions on the role of governance in limiting excessive risk-taking at times of turmoil.
Design/methodology/approach
Corporate governance measures are regressed on measures of risk taking using a sample of US bank holding companies (BHCs) during 2002-2014.
Findings
Results show that BHCs with more concentrated shareholders, more managerial ownership, smaller boards, and less outside directors undertake less risky investments with respect to total assets, loans, and off-balance-sheet items. Capital adequacy effect is overpowering pushing for more risky positions. Finally, banks with good governance push for less risky positions, even with larger capital ratios, during the financial crisis period relative to the precrisis boom.
Practical implications
This paper extends research on the association between bank ownership structure and risk taking. It adds to prior research by examining a key feature of banks, namely, their bank-specific capital adequacy. The relevance of this study stems from recent initiatives undertaken by the Basel Committee, the Group of Thirty (G30), and bank regulators to address deficient corporate governance structures that led to bank breakdowns.
Originality/value
One of the innovations of this paper is the use of risk-weighted measures to proxy for risk taking in banks, using risk weights used by bank regulators to adjust for operational risk, credit risk, and market risk.
Keywords
Acknowledgements
This paper has benefited from the valuable comments of John O’Hanlon, Ken Peasnell, participants at the Lancaster University Management School Accounting and Finance seminar series, the AUS 5th Annual Research Symposium in Business and Economics, the 2013 joint BAFA Northern Area Group and Interdisciplinary Perspectives Special Interest Group annual conference, and from valuable remarks of anonymous reviewers.
Citation
Abou-El-Sood, H. (2017), "Corporate governance structure and capital adequacy: implications to bank risk taking", International Journal of Managerial Finance, Vol. 13 No. 2, pp. 165-185. https://doi.org/10.1108/IJMF-04-2016-0078
Publisher
:Emerald Publishing Limited
Copyright © 2017, Emerald Publishing Limited