The influence of corporate governance on banks' risk and performance : evidence from the US banking sector

• Main Author: Gilani, Usman Javed
• Format: Dissertation
• Language: English
• Published: University of Leeds 2019

The thesis aims to contribute to the literature on bank governance by examining the influence of board characteristics on the performance, risk exposure and capital structure adjustment of the U.S. banks. Chapter 2 sheds light on the importance of corporate governance and discusses in detail the mechanisms it offers to deal with the agency problems specific to banks. The chapter also provides a review of the extant literature on bank corporate governance and discusses how bank governance is different from the governance of non-financial firms. More specifically, chapter 3 analyses the appointments of outside CEOs of financial and non-financial firms as independent directors on US bank boards and their implications for the banks and the outside CEO firms. The study shows that outside CEOs from financial firms match with less traditional banks, while CEOs from non-financial firms match with more lending-oriented banks. Appointing outside CEOs from financial firms generates higher abnormal returns for the appointing bank as compared to other director appointments and long-term benefits for both the appointing bank and for the outside CEO firm. In contrast, appointing CEOs from non-financial firms does not benefit the bank while it generates positive abnormal returns and longer-term benefits, especially in terms of credit access, for the firm of the outside CEO. Overall, although considered highly skilled directors, outside CEOs are not always beneficial to bank boards. Chapter 4 investigates the impact of board independence on a bank's capital management using a sample of US-listed banks. The study shows that banks with more independent boards privilege lower target capital ratios and adjust more slowly (quickly) towards the target ratio when they are undercapitalized (overcapitalized). Replacing independent directors without financial expertise with financial expert directors, as advocated by regulators, further lowers target ratios but accelerates the recapitalization process of undercapitalized banks by means of equity issuance. Further tests, exploiting exogenous variation in regulatory scrutiny across banks, show that a stronger regulatory oversight induces independent directors, especially when they have financial expertise, to favour a bank capital management less aligned to shareholder interests.