The Roles of Corporate Governance in Bank Failures During the Recent Financial Crisis

Allen N. Berger, Björn Imbierowicz, Christian Rauch

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Abstract

We analyze the roles of bank ownership, management, and compensation structures in bank failures during the recent financial crisis. Our results suggest that failures are strongly influenced by ownership structure: high shareholdings of lower-level management and non-chief executive officer (non-CEO) higher-level management increase failure risk significantly. In contrast, shareholdings of banks’ CEOs do not have a direct impact on bank failure. These findings suggest that high stakes in the bank induce non-CEO managers to take high risks due to moral hazard incentives, which may result in bank failure. We identify tail risk in noninterest income as a primary risk-taking channel of lower-level managers.
Original languageEnglish
JournalJournal of Money, Credit and Banking
Volume48
Issue number4
Pages (from-to)729-770
Number of pages42
ISSN0022-2879
DOIs
Publication statusPublished - 2016

Keywords

  • Bank regulation
  • Bank default
  • Corporate governance

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