Working Paper: CEPR ID: DP10185
Authors: Deniz Anginer; Asli Demirgüç-Kunt; Harry Huizinga; Kebin Ma
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
JEL Codes: G21; M21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| shareholder-friendly corporate governance (G38) | bank insolvency risk (G21) |
| good corporate governance (G38) | higher asset volatility (G19) |
| good corporate governance (G38) | more nonperforming loans (G21) |
| good corporate governance (G38) | lower tangible capital ratio (G32) |
| good corporate governance (G38) | increased risk-taking during economic expansion (E32) |
| bank size interacts with corporate governance (G38) | bank insolvency risk (G21) |
| fiscal balance of the country interacts with corporate governance (G38) | bank insolvency risk (G21) |