Better Safe than Sorry. Will New Rules on Bank Corporate Governance Prevent Excessive Risk Taking?

Abstract

Conventional wisdom leads to assert that good governance may underpin bank performance while bad governance destroys stability and soundness. Using the banks in the Eurostoxx index, we run a factor analysis that enables us to synthesize 23 bank board characteristics into seven key features: independence, size, dedication, tenure, corporate governance quality, external perspective, competence and diversity. We then use a multiple regression and find that indeed Corporate Governance curbs risk taking - measured by Z-Score - by banks in our sample. Our findings try to assess which governance variables are most relevant for regulators in containing bank risk taking.