The impact of corporate governance mechanisms on mitigating banks' propensity for risk-taking

Abstract

This study aims to examine the impact of enhanced corporate governance procedures on the level of risk-taking exhibited by banks. Between the years 2002 and 2019, a comprehensive selection of banks was gathered from a total of eight countries and categorized into two legal systems: common-law (Canada, the United States, the United Kingdom, and Australia) and civil-law (Japan, France, Germany, and Italy). By classifying our sample into systemic and non-systemic banks and employing traditional risk-taking metrics such as the z-score and the volatility of daily stock returns, we provide evidence of a substantial decline in banks' propensity for risk-taking in the years subsequent to the global financial crisis. This decrease can be attributed to the implementation of enhanced bank governance practices, which have been deemed more efficacious by the Basel Committee on Banking Supervision. Furthermore, it is worth noting that empirical data supports the notion that macroeconomic and institutional factors specific to each country, such as GDP per capita, government quality index, unemployment rate, and social trust, significantly influence the risk-taking tendencies exhibited by banks. The findings of our study demonstrate robustness when subjected to various sensitivity tests conducted for each research question.