8-9 November 2012: DNB/CGIC Workshop on Corporate Governance of Financial Institutions
A joint workshop between DNB and CGIC on Corporate Governance of Financial Institution.
Location: Amsterdam, the Netherlands, De Nederlandsche Bank
On November 8-9 a conference on Corporate Governance of Financial Institutions took place at De Nederlandsche Bank (DNB)
Since the financial and economic crisis a great deal of scrutiny by investors, the media, governments and regulatory institutions has focused on corporate governance failures within financial institutions. This conference contributed to the emerging trends in academic research and took stock of the most important developments in the theory, policy and practice of the corporate governance of financial institutions. The conference was sponsored jointly by DNB and the Corporate Governance Insights Center at the University of Groningen (RUG)
er a brief welcoming introduction by Hans van Ees (RUG), the first day started with the keynote speech by Luc Laeven. In an insightful presentation he focused on the peculiar features differentiating banks from other non-financial firms and highlighted the limits of traditional corporate governance mechanisms. He also discussed the relationships existing among banks’ ownership structures, regulation and resolution frameworks, and their impact on risk-taking by banks. He concluded his presentation by emphasizing the role of macroprudential regulation and enhanced capital regulation in inducing sound banking and dealing with systemic risk.
first session was opened by Jakob de Haan and Razvan Vlahu, who presented a survey of the empirical literature on corporate governance of banks. They discussed the main differences between the corporate governance of financial vs. non-financial firms, differences stemming from regulation of banking activities, capital structure of banks, and complexity and opacity of their activities. They also presented the conflicting views regarding the role of traditional corporate governance mechanisms such as board characteristics, ownership structures and executive remuneration. Francois Derrien followed and examined (in a paper jointly written with Olivier Dessant) the impact of league tables’ rankings on banks’ incentives. He showed evidence for banks willingness to give up current fees and to focus on activities which can increase their league table rating (and subsequently their future fees), activities which not necessarily make their clients better off.
second session dealt with the impact of inside debt on bank risk-taking and the role played by the governance structure in mutual fund industry. With respect to the first topic, Sjoerd van Bekkum presented evidence for the beneficial impact of inside debt on reducing bank risk. He argued that banks with higher benefit pensions and deferred compensations exhibit greater returns, lower volatility and lower probability of distress. With respect to the second topic, Russ Wermers argued (in joint work with Bill Ding) that internal governance matters in mutual fund industry. Using a new data set covering 1985 to 2002 period, he showed that funds with a larger number of independent directors are more likely to replace the underperforming managers and also tend to perform better.
The first day concluded with a panel discussion with contributions by Antony Burgmans (Monitoring Commission Banking Code), Jan Sijbrand (DNB), Koos Timmermans (ING), and Arnoud Boot (University of Amsterdam). The moderator was Paul Frentrop (Nyenrode Business University). The panelists discussed the various causes of the recent financial crisis and agreed that the crisis was triggered by the interplay among several factors, among them high leverage based on short-term funding, increased exposure to subprime risk, increased marketability of opaque products facilitated by technological innovation, poor bank risk management. Moving forward, the panelists discussed the role of corporate governance at financial institutions, and the features usually identified as “good governance”, including the increased focus on the interests of shareholders.
The second day of the conference kicked off with the keynote speech delivered by Rene Stulz. In his speech professor Stulz focused on the role played by governance and risk culture on banks’ performance prior and during financial turmoil. He argued that poor governance, poor managerial incentives and differences in regulation cannot explain poor bank performance during the crisis. He discussed the contribution of risk management activities on banks’ performance during the crisis, showing some recent evidence for the positive impact of powerful CROs on bank’s stability.
first and the second sessions of the second day were centered around the role of executive compensation. Marc Steffen Rapp presented a joint paper with Alexander Huttenbrink and Christoph Kaserer and showed evidence for the “dark side” of incentives schemes. He argued that in presence of stricter regulation, executive incentives (and in particular short-term bonuses) are positively correlated with risk-taking. However, the next paper, presented by Patricia Boyallian (co-authored by Pablo Ruiz-Verdu) found that termination payments and contingent schemes, such as options granting, are not responsible for the increase in risk-taking. She argued that only the combination between equity compensation and high leverage can lead to more risk-taking and subsequent underperformance. Similar findings were reported by Brian Bolton (in joint work with Sanjai Bhagat). He argued though that executives’ incentives compensation based on restricted stock and stock options can be effective in aligning managers’ and shareholders’ interests, while higher leverage buffers this impact. Finally, Thomas Kick discussed discretionary accounting choices during CEO turnovers for a sample of German banks over the period 1993-2009. He showed that incoming CEOs increase discretionary expenses during their first year and that such expenses are larger for outsider CEOs.
The last two papers of the conference focused on the central bank governance and the relation between board composition and bank risk taking. Kasper Roszbach presented a paper (joint work with Michael Koetter and Giancarlo Spagnolo) on the effects of central bank governance on financial stability. Exploiting a survey dataset he found that separation of supervisory activities between multiple agencies cannot explain credit risk prior or during the financial crisis. However, prior to the crisis, there is evidence for a positive correlation between the level of non-performing loans and the foreign currency objective of the regulator, this relation being stronger for countries which had experienced a currency crisis in the past and were subject to more frequent IMF missions. The last paper of the conference was presented by Klaus Schaeck (joint work with Allen Berger and Thomas Kick). He provided evidence for the impact of socioeconomic characteristics of the executive boards of German banks on risk-taking. He documented the existence of a negative relationship between age and education on risk-taking, while an increase in female representation has a positive association with risk-taking.