Good corporate governance is bad for bank capitalisation
Deniz Anginer, Asli Demirgüç-Kunt, Harry Huizinga, Kebin Ma 10 November 2013
Bank capitalisation determines the probability of a bank failure. This column discusses how bank’s corporate governance affects its capitalisation. Corporate governance, in which the bank acts in the interest of its shareholders, is defined as a good one. Such governance, however, can lead to lower bank capitalisation. It also has possibly negative implications for financial stability.
A failing bank can be defined as one that has insufficient capital. Bank capitalisation strategies thus are crucial in determining the probability of a bank failure. Confirming this, Berger and Bouwman (2013) find that higher levels of pre-crisis capital increase a bank’s probability of survival during a banking crisis. Beltratti and Stulz (2012) and Demirguc-Kunt, Detragiache and Merrouche (2013) find that banks that were better capitalised before the crisis had a better stock-market performance during the crisis.
corporate governance, bank capitalisation, banks
Banks’ losses and capital: The new version of the paradox of Achilles and the tortoise
Marco Onado 19 August 2008
Many banks are raising fresh capital but not as fast as they are reporting fresh write-downs. Unless regulators push banks to rebuild their equity bases more quickly, the crisis will be more painful and protracted than necessary. Merrill Lynch is a salutary example.
One of the most important lessons from the subprime crisis is that the growth of banks’ capital fell behind the dramatic growth of total credit and overall risks over the last twenty years. Until August 2007, we were not alarmed by this, having been lulled by the comforting hypothesis that the risks were sold outside the banking system and widely spread over many investors.
subprime crisis, bank capitalisation