The Impact of Corporate Governance and Risk Management in Banks during the Financial Crisis in Europe
Despite the fact that bank performance from 2007 to 2008 was one of the worst since the Great Depression, there is a huge variety in the cross-section of stock returns of banks over the world prior and amid that period. We utilize this variety to assess the essentiality of components that have been helped the poor performance of banks during the credit emergency. With respect to corporate governance variables of financial institutions this paper examines whether risk management related corporate governance instruments, for instance, the presence of a Chief Risk Officer (CRO) in a bank’s executive board and the existence of large shareholders, are connected with the bank performance during the financial crisis of 2007/2008 focusing in the area of Europe. Furthermore, our paper tries to investigate if there was any association between these corporate governance characteristics and stock returns for a longer period, from 2005 to 2008. Above all, our results illustrates that during the crisis period 2007/2008, the existence of large shareholders are statistically significant and had a negative connection to the banks’ performance, whilst the variable of CRO is insignificant. Contrary, for the longer examined period of 2005-2008, the outcomes shows that banks in which the CRO was a member of the Executive board had a negative significance relationship with bank performance while the existence of a large shareholder had no association in the same period. We calculate bank performance by buy and hold returns including dividends and we control for financial controls, bank attributes and corporate governance variables, such as ownership structure and corporate boards.