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Bank of Finland Research Discussion Papers, Bank of Finland

No 28/2014:
Crisis performance of European banks does management ownership matter?

Hanna Westman ()

Abstract: Failure in bank corporate governance has been seen as a contributing factor to excessive risk-taking pre-crisis with devastating implications as risks realised during the financial crisis. Unfortunately, the empirical evidence on the impact of managerial incentives on bank crisis performance is scarce. Moreover, bank strategy has not previously been accounted for. Hence, this paper presents novel findings on drivers for risk-taking and crisis performance. Specifically, I find a positive impact of management ownership in small diversified banks and non-traditional banks, the monitoring of which is challenging due to their opacity. The impact is negative in traditional banks and large diversified banks, indicating that shareholders induce managers to take risk where the safety net creates incentives for risk-shifting to debt holders and taxpayers. These findings have implications for both academic research as well as policy making particularly in the domain of corporate governance.

Keywords: banks' crisis performance; management ownership; traditional vs. nontraditional banking; diversification; safety net; bank opacity and complexity; (follow links to similar papers)

JEL-Codes: G01; G21; G28; G32; L25; (follow links to similar papers)

66 pages, November 26, 2014

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