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 7: Bank Ownership and Risk Taking: Improving Corporate Governance in Banking after the Crisis

Kenneth R. Spong and Richard J. Sullivan


Kenneth R. Spong and Richard J. Sullivan* 7.1 INTRODUCTION The recent financial crisis, which started with the collapse in US subprime mortgage markets, has significantly disrupted the financial systems and economies in most major countries, making it the most severe crisis experienced in many years. Financial institutions and others greatly underestimated the risks they were taking and failed to prepare for the possibility of a financial breakdown. The depth of the crisis further forced public authorities to take a number of nearly unprecedented steps to support major financial institutions and markets. While a variety of factors contributed to the crisis, many have suggested that a critical element was the lack of sound corporate governance at financial institutions. According to this view, deficiencies in corporate governance provided strong incentives to take on excessive risks. As an example, some claim that executive compensation at banks and securities firms was structured in a manner that rewarded short-term performance and high-risk strategies instead of long-term performance. There are other reasons why governance and private discipline might have been considered inadequate and regarded as factors contributing to the crisis. Deposit insurance, financial regulation and the new policy actions taken during this crisis (expanded deposit insurance coverage, debt and money market fund guarantees, and broader liquidity assistance) have given depositors, creditors, stockholders and others substantial protection against the risks assumed by financial institutions. In response, these parties may not have played as much of a role in the discipline and governance of such institutions as they...

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