When do regulations matter for bank risk-taking? An analysis of the interaction between external regulation and board characteristics

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Abstract

Purpose - According to previous international studies the impact of external regulation on bank risk is ambiguous. This paper asks the question, “When do regulations matter for bank risk-taking?” by reporting the first empirical investigation of how the relation between bank regulations (capital requirements, official supervisory power, and market discipline) and bank
risk-taking is moderated by board monitoring characteristics.

Design/methodology/approach - Using SYS-GMM, the analysis of the interaction between bank-level boards of directors’ attributes (board size, board independence, and board gender diversity) and external regulation is based on a sample of 493 banks operating in 54 countries over 2001-2015, accounting for three measures of bank risk-taking.

Findings - Regulations matter for bank risk-taking conditional on board characteristics:board size, board independence and board diversity. With the exception of capital requirements, the market discipline exerted by external private monitoring and greater supervisory power are unable to mitigate the propensity to greater risk taking by banks resulting from larger board size, higher board independence and greater gender diversity of the board.

Originality/value - The bank risk empirical literature is still silent as to the interaction between board governance and regulation for the purpose of examining banks’ risk-taking. This paper fills this gap, thus making a significant contribution by extending our knowledge of whether and how board governance moderates the relationship between external regulation and bank risk-taking.
Original languageEnglish
Pages (from-to)440-461
Number of pages22
JournalCorporate Governance
Volume18
Issue number3
Early online date24 Jan 2018
DOIs
Publication statusPublished - 2018

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Interaction
Board characteristics
Bank risk taking
Board size
Board independence
Market discipline
Gender diversity
Bank risk
Capital requirements
Governance
Monitoring
Propensity
Design methodology
Empirical investigation
Bank regulation
International studies
Private monitoring
Risk taking
Board of directors

Keywords

  • Corporate governance
  • Board of directors
  • Regulation
  • Banks
  • Risk taking

Cite this

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title = "When do regulations matter for bank risk-taking? An analysis of the interaction between external regulation and board characteristics",
abstract = "Purpose - According to previous international studies the impact of external regulation on bank risk is ambiguous. This paper asks the question, “When do regulations matter for bank risk-taking?” by reporting the first empirical investigation of how the relation between bank regulations (capital requirements, official supervisory power, and market discipline) and bankrisk-taking is moderated by board monitoring characteristics.Design/methodology/approach - Using SYS-GMM, the analysis of the interaction between bank-level boards of directors’ attributes (board size, board independence, and board gender diversity) and external regulation is based on a sample of 493 banks operating in 54 countries over 2001-2015, accounting for three measures of bank risk-taking.Findings - Regulations matter for bank risk-taking conditional on board characteristics:board size, board independence and board diversity. With the exception of capital requirements, the market discipline exerted by external private monitoring and greater supervisory power are unable to mitigate the propensity to greater risk taking by banks resulting from larger board size, higher board independence and greater gender diversity of the board.Originality/value - The bank risk empirical literature is still silent as to the interaction between board governance and regulation for the purpose of examining banks’ risk-taking. This paper fills this gap, thus making a significant contribution by extending our knowledge of whether and how board governance moderates the relationship between external regulation and bank risk-taking.",
keywords = "Corporate governance, Board of directors, Regulation, Banks, Risk taking",
author = "{De Vita}, Glauco and Yun Luo",
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pages = "440--461",
journal = "Corporate Governance (Bingley)",
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AU - Luo, Yun

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N2 - Purpose - According to previous international studies the impact of external regulation on bank risk is ambiguous. This paper asks the question, “When do regulations matter for bank risk-taking?” by reporting the first empirical investigation of how the relation between bank regulations (capital requirements, official supervisory power, and market discipline) and bankrisk-taking is moderated by board monitoring characteristics.Design/methodology/approach - Using SYS-GMM, the analysis of the interaction between bank-level boards of directors’ attributes (board size, board independence, and board gender diversity) and external regulation is based on a sample of 493 banks operating in 54 countries over 2001-2015, accounting for three measures of bank risk-taking.Findings - Regulations matter for bank risk-taking conditional on board characteristics:board size, board independence and board diversity. With the exception of capital requirements, the market discipline exerted by external private monitoring and greater supervisory power are unable to mitigate the propensity to greater risk taking by banks resulting from larger board size, higher board independence and greater gender diversity of the board.Originality/value - The bank risk empirical literature is still silent as to the interaction between board governance and regulation for the purpose of examining banks’ risk-taking. This paper fills this gap, thus making a significant contribution by extending our knowledge of whether and how board governance moderates the relationship between external regulation and bank risk-taking.

AB - Purpose - According to previous international studies the impact of external regulation on bank risk is ambiguous. This paper asks the question, “When do regulations matter for bank risk-taking?” by reporting the first empirical investigation of how the relation between bank regulations (capital requirements, official supervisory power, and market discipline) and bankrisk-taking is moderated by board monitoring characteristics.Design/methodology/approach - Using SYS-GMM, the analysis of the interaction between bank-level boards of directors’ attributes (board size, board independence, and board gender diversity) and external regulation is based on a sample of 493 banks operating in 54 countries over 2001-2015, accounting for three measures of bank risk-taking.Findings - Regulations matter for bank risk-taking conditional on board characteristics:board size, board independence and board diversity. With the exception of capital requirements, the market discipline exerted by external private monitoring and greater supervisory power are unable to mitigate the propensity to greater risk taking by banks resulting from larger board size, higher board independence and greater gender diversity of the board.Originality/value - The bank risk empirical literature is still silent as to the interaction between board governance and regulation for the purpose of examining banks’ risk-taking. This paper fills this gap, thus making a significant contribution by extending our knowledge of whether and how board governance moderates the relationship between external regulation and bank risk-taking.

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KW - Board of directors

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