مدیریت ریسک، اداره امور شرکت و عملکرد بانک در بحران مالی
|کد مقاله||سال انتشار||مقاله انگلیسی||ترجمه فارسی||تعداد کلمات|
|797||2012||14 صفحه PDF||سفارش دهید||14130 کلمه|
Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Journal of Banking & Finance, Volume 36, Issue 12, December 2012, Pages 3213–3226
The recent financial crisis has raised several questions with respect to the corporate governance of financial institutions. This paper investigates whether risk management-related corporate governance mechanisms, such as for example the presence of a chief risk officer (CRO) in a bank’s executive board and whether the CRO reports to the CEO or directly to the board of directors, are associated with a better bank performance during the financial crisis of 2007/2008. We measure bank performance by buy-and-hold returns and ROE and we control for standard corporate governance variables such as CEO ownership, board size, and board independence. Most importantly, our results indicate that banks, in which the CRO directly reports to the board of directors and not to the CEO (or other corporate entities), exhibit significantly higher (i.e., less negative) stock returns and ROE during the crisis. In contrast, standard corporate governance variables are mostly insignificantly or even negatively related to the banks’ performance during the crisis.
This paper investigates whether the presence of a chief risk officer (CRO) in the executive board of a bank, the line of reporting of the CRO, and other risk management-related corporate governance mechanisms (which are also termed “risk governance”) positively affect bank performance during the recent financial crisis. The paper combines and further develops relevant previous findings from three major areas of research: corporate governance, enterprise risk management (ERM), and bank performance. Whereas scandals such as Enron and Worldcom gave primarily rise to new developments in accounting practices, the financial crisis following the subprime meltdown in the US has led to a further growing awareness and need for appropriate risk management techniques and structures within financial organizations.1 In quantitative risk management, the focus lies on how to improve the measurement and management of specific risks such as liquidity risk, credit risk, and market risk. On a structural level, the issue of how to integrate these risks into one single message to senior executives is being addressed. Earlier literature on risk management focused on single types of risk while missing out on the interdependence to other risks (Miller, 1992). Consequently, only in the 1990s, the academic literature started to focus on an integrated view of risk management (e.g., Miller, 1992, Miccolis and Shaw, 2000, Cumming and Mirtle, 2001, Nocco and Stulz, 2006 and Sabato, 2010). In addition, public policy makers around the world have started to question the appropriateness of the current corporate governance applied to financial institutions. In particular the role and the profile of risk management in financial institutions has been put under scrutiny. In many recent policy documents, comprehensive risk management frameworks are outlined in combination with recommended governance structures (e.g., Basel Committee on Banking Supervision, 2008, FSA, 2008, IIF, 2007 and Walker, 2009). One common recommendation is to “put risk high on the agenda” by creating respective structures. This can involve many different actions. As already claimed by the Sarbanes-Oxley Act (SOX) in 2002, financial expertise is considered to play an important role. Other, more specific measures involve either the creation of a dedicated risk committee or designating a CRO who oversees all relevant risks within the institution (e.g., Brancato et al., 2006 and Sabato, 2010). Mongiardino and Plath (2010) show that the risk governance in large banks seems to have improved only to a limited extent despite increased regulatory pressure induced by the credit crisis. They outline best practices in banking risk governance and highlight the need to have at least (1) a dedicated board-level risk committee, of which (2) a majority should be independent, and (3) that the CRO should be part of the bank’s executive board. By surveying 20 large banks, however, they find only a small number of banks to follow best practices in 2007. Even though most large banks had a dedicated risk committee, most of them met very infrequently. Also, most risk committees were not comprised of enough independent and financially knowledgeable members (see also Hau and Thum, 2009). And most of those large banks had a CRO but its position and reporting line did not ensure an appropriate level of accessibility and thus influence on the CEO and the board of directors.2 Whereas the role and importance of the CRO, and risk governance more generally, in the banking industry has been highlighted in the newspapers, in various reports (Brancato et al., 2006), as well as in practitioner-oriented studies (e.g., Banham, 2000), it has been largely neglected in the academic literature so far. The only exception we are aware of is the contemporaneous study by Ellul and Yerramilli (2011). They investigate whether a strong and independent risk management is significantly related to bank risk taking and performance during the credit crisis in a sample of 74 large US bank holding companies. They construct a Risk Management Index (RMI) which is based on five variables related to the strength of a bank’s risk management, including a dummy variable whether the bank’s CRO is a member of the executive board and other proxy measures for the CRO’s power within the bank’s management board. Their findings indicate that banks with a high RMI value in 2006 had lower exposure to private-label mortgage-backed securities, were less active in trading off-balance sheet derivatives, had a smaller fraction of non-performing loans, had lower downside risk, and a higher Sharpe Ratio during the crisis years 2007/2008. Some other aspects of corporate governance in banks, such as board characteristics and CEO pay and ownership, have been addressed in a few recent academic studies (e.g., Beltratti and Stulz, forthcoming, Erkens et al., 2010, Fahlenbrach and Stulz, 2011 and Minton et al., 2010). However, the literature on corporate governance and the valuation effect of corporate governance in financial firms is still very limited. Moreover, financial institutions do have their particularities, such as higher opaqueness, heavy regulation and intervention by the government (Levine, 2004), which require a distinct analysis of corporate governance issues. Consistently, Adams and Mehran (2003) and Macey and O’Hara (2003) highlight the importance of taking differences in governance between banking and non-banking firms into consideration. Two recent studies by Beltratti and Stulz (forthcoming) and Fahlenbrach and Stulz (2011) analyze the influence of corporate governance on bank performance during the credit crisis. However, both studies rely on variables that have been used in the literature to analyze the relation between corporate governance and firm value of non-financial institutions. Fahlenbrach and Stulz (2011) analyze the influence of CEO incentives and share ownership on bank performance and find no evidence for a better performance of banks in which the incentives provided by the CEO’s pay package are stronger (i.e., the fraction of equity-based compensation is higher). In fact, their evidence rather points to banks providing stronger incentives to CEOs performing worse in the crisis. A possible explanation for this finding is that CEOs may have focused on the interests of shareholders in the build-up to the crisis and took actions that they believed the market would welcome. Ex post, however, these actions were costly to their banks and their shareholders when the results turned out to be poor. Moreover, their results indicate that bank CEOs did not reduce their stock holdings in anticipation of the crisis, and that CEOs did not hedge their holdings. Hence, their results suggest that bank CEOs did not anticipate the crisis and the resulting poor performance of the banks as they suffered huge losses themselves.3 Beltratti and Stulz (forthcoming) investigate the relation between corporate governance and bank performance during the credit crisis in an international sample of 98 banks. Most importantly, they find that banks with more shareholder-friendly boards as measured by the “Corporate Governance Quotient” (CGQ) obtained from RiskMetrics performed worse during the crisis, which indicates that the generally shared understanding of “good governance” does not necessarily have to be in the best interest of shareholders. Beltratti and Stulz (forthcoming) argue that “banks that were pushed by their boards to maximize shareholder wealth before the crisis took risks that were understood to create shareholder wealth, but were costly ex post because of outcomes that were not expected when the risks were taken” (p. 3). Erkens et al. (2010) investigate the relation between corporate governance and performance of financial firms during the credit crisis of 2007/2008 using an international sample of 296 financial firms from 30 countries. Consistent with Beltratti and Stulz (forthcoming), they find that firms with more independent boards and higher institutional ownership experienced worse stock returns during the crisis. They argue that firms with higher institutional ownership took more risk prior to the crisis which resulted in larger shareholder losses during the crisis period. Moreover, firms with more independent boards raised more equity capital during the crisis, which led to a wealth transfer from existing shareholders to debtholders. Minton et al. (2010) investigate how risk taking and U.S. banks’ performance in the crisis are related to board independence and financial expertise of the board. Their results show that financial expertise of the board is positively related to risk taking and bank performance before the crisis but is negatively related to bank performance in the crisis. Finally, Cornett et al. (2010) investigate the relation between various corporate governance mechanisms and bank performance in the crisis in a sample of approximately 300 publicly traded US banks. In contrast to Erkens et al., 2010 and Beltratti and Stulz, forthcoming, and Fahlenbrach and Stulz (2011), they find better corporate governance, for example a more independent board, a higher pay-for-performance sensitivity, and an increase in insider ownership, to be positively related to the banks’ crisis performance. In this paper, we argue that one important difference between financial and non-financial firms, that has to be taken into account, is the role of risk management in the governance structure of financial firms. While the importance of risk management has been recognized, the actual role of risk management in a corporate governance context still lacks common interpretation. We contribute to the existing literature by analyzing the influence of bank-specific corporate governance, and in particular “risk governance” characteristics on the performance of banks during the financial crisis. Most banks still seem to consider asset growth and a reduction of operational costs as the main drivers of profitability. Risk management has often the role of a support/control function. However, the last financial crisis has clearly demonstrated that the business of banks is risk, therefore the legitimate question arises whether the CRO should not hold a more important and powerful role within banks. As in Beltratti and Stulz (forthcoming) and Fahlenbrach and Stulz (2011), we collect our measures of corporate governance for 2006, the last complete year before the financial crisis. We use both hand-collected data from 10 k (annual report) and Def 14A (Proxy Statement) forms in the SEC’s EDGAR database as well as data from several commercial databases including RiskMetrics (formerly Investor Responsibility Research Center or IRRC) and ExecuComp. We investigate whether corporate and risk governance measures at the end of the year 2006 are significantly related to the banks’ stock returns and ROE during the crisis period. Following Beltratti and Stulz (forthcoming) and Fahlenbrach and Stulz (2011), we define the crisis period to last from July 1, 2007, to December 31, 2008. Our results provide robust evidence that banks, in which the CRO reports directly to the board of directors, perform significantly better in the credit crisis while banks in which the CRO reports to the CEO perform significantly worse than other banks in our sample. This result confirms our hypothesis that the typical corporate governance structure with all executive board members reporting to the CEO is not the most appropriate for banking organizations. Hence, the CEO and CRO may have conflicting interests and while a stronger role of the CEO may increase growth and profitability in a good market environment, it may result in large losses in crises periods such as the recent credit crisis of 2007/2008 and vice versa. In contrast, the relation between most of our other measures of risk governance and bank performance in the crisis is insignificant. Moreover, our results with respect to the standard corporate governance mechanisms indicate that a bank’s stock returns (and ROE) during the crisis are either unaffected by standard corporate governance variables, such as CEO ownership or the corporate governance index of Gompers et al. (2003), or are even negatively related to certain governance mechanisms such as board size (i.e., positively related with board size which is usually considered to indicate poor governance; e.g., see Yermack, 1996) or board independence. Hence, our results on the “standard” corporate governance mechanisms are largely consistent with Beltratti and Stulz (forthcoming) and Fahlenbrach and Stulz (2011). These results suggest that banks were pushed by their boards to maximize shareholder wealth before the crisis and thereby took risks that were understood to create wealth but later turned out poorly in the credit crisis. The remainder of the paper is organized as follows. Section 2 describes the sample and the variables. Section 3 reports the empirical results. Section 4 concludes.
نتیجه گیری انگلیسی
In this paper, we analyze the influence of bank-specific corporate governance, and in particular “risk governance” characteristics on the performance of banks during the financial crisis. Most importantly, our results show that banks, in which the CRO reports directly to the board of directors, perform significantly better in the financial crisis while banks in which the CRO reports to the CEO perform significantly worse than other banks in our sample. This result supports our initial hypothesis that risk governance in general and the reporting line of the CRO in particular are important to the banks’ crisis performance as the CEO and CRO may have conflicting interests and if the CRO reports to the CEO, the risk agenda may not receive the appropriate attention. In contrast, and consistent with Beltratti and Stulz (forthcoming) and Fahlenbrach and Stulz (2011), we find either no significant or even a negative relation between a bank’s performance during the crisis and standard corporate governance variables such as CEO ownership, board independence, or shareholder rights as proxied by the G-Index of Gompers et al. (2003). This may indicate that banks were pushed by their boards to maximize shareholder wealth before the crisis and took risks that were understood to create wealth but later turned out poorly in the credit crisis. Hence, our results show that standard governance measures as used in a large body of literature on corporate governance and its valuation effect in non-financial firms may fall short in describing the relevant governance structure of banks, in particular with respect to their crisis performance. Our results highlight the importance of the so-called “risk governance” in banks. Specifically, we conclude that banks, to be better prepared to face the next financial crisis, have to significantly improve the quality and profile of their risk management function, but also embed the appropriate risk governance having CEO and CRO at the same level, ideally both reporting to the board of directors. This, however, may come at the cost of a lower performance in a normal (i.e., non-crisis) market environment.