Research Handbook on International Banking and Governance
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Research Handbook on International Banking and Governance

Edited by James R. Barth, Chen Lin and Clas Wihlborg

The contributors – top international scholars from finance, law and business – explore the role of governance, both internal and external, in explaining risk-taking and other aspects of the behavior of financial institutions. Additionally, they discuss market and policy features affecting objectives and quality of governance. The chapters provide in-depth analysis of factors such as: ownership, efficiency and stability; market discipline; compensation and performance; social responsibility; and governance in non-bank financial institutions. Only through this kind of rigorous examination can one hope to implement the financial reforms necessary and sufficient to reduce the likelihood and severity of future crises.
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Chapter 1: Bank Governance: Concepts and Measurements

Frank M. Song and Li Li


Frank M. Song and Li Li 1.1 BANK GOVERNANCE: SELECTED LITERATURE REVIEW Corporate governance has long been a hot topic for research (see Shleifer and Vishny, 1997; Denis and McConnell, 2003, for survey). Despite the general focus on this topic, relatively limited attention has been paid to the corporate governance of banks (e.g., Macey and O’Hara, 2003; Levine, 2004; Adams and Mehran, 2005; Caprio et al., 2007; Dahya et al., 2008). This is strange, considering the fact that corporate governance of banks is not only important but also unique (Levine, 2004). It is important to understand corporate governance of banks for several reasons. First of all, banks are themselves corporations. Sound corporate governance is essential for banks to perform efficiently. Moreover, since banks exert a strong impact on economic development (Levine, 1997, 2005), corporate governance of banks is crucial for growth and development. Banks play a central role in mobilizing social savings and channeling them to the most productive projects. Bank lending is a major source of external finance for other firms, especially in developing and emerging economies. Sound corporate governance of banks is essential for bank managers to allocate social capital efficiently and to enhance the performance of the economies. Banks also play a critical role in the corporate governance of other firms (Franks and Mayer, 2001; Santos and Rumble, 2006), as creditors of firms and, in many countries, as equity holders. Thus, it is also essential that banks themselves face sound corporate governance so that they can exert...

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