Corporate Governance in Banking: a Conceptual Framework

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Corporate Governance in Banking: A Conceptual Framework

Penny Ciancanelli E-mail: p.ciancanelli@strath.ac.uk And Jose Antonio Reyes Gonzalez E-mail: areyes@eh.quik.co.uk

Department of Accounting and Finance Strathclyde University Glasgow, G4 0LN Tel: (44) (0) 141 548-3896 Fax: (44) (0) 141 548-3547

This paper can be downloaded from the Social Science Research Network Electronic Paper Collection: http://papers.ssrn.com/paper.taf?abstract_id=253714

Paper submitted for presentation at the European Financial Management Association Conference, Athens, June, 2000 The authors would appreciate that the copyright of this conference paper be respected and that no part of it is cited without the permission of the authors. The paper was presented by Jose A. Reyes-Gonzalez. Correspondance should be directed to Penny Ciancanelli.

Corporate Governance in Banking: A Conceptual framework

Abstract In the wake of far reaching financial system reforms, almost three fourths of the member countries of the IMF experienced significant episodes of systemic crisis and associated bank failures. Notably absent in the ensuing debates on the correlation between financial system reforms and systemic crisis was discussion of corporate governance in the affected banks and the role it may have played in the provoking financial crisis. Consideration of corporate governance in banks is, however, apparently easier said than done. While there is a great deal of empirical research on corporate governance, very little of it concerns the behaviour of owners and managers of banks; all of it assumes that banks conform to the concept of the firm used in Agency Theory. The aim of this paper is to demonstrate the limitations of that assumption and to propose an alternative conceptual framework more suitable to its analysis. We argue that commercial banks are distinguished by a more complex structure of information asymmetry arising from the presence of regulation. We show how regulation limits the power of markets to discipline the bank, its owners and its managers and argue that regulation must be seen as an external force, which alters the parameters of governance in banks. Key words: Corporate Governance, Banks, Regulation, Agency Theory.

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Introduction Between 1980 to 1997, over 130 countries, comprising almost three fourths of the member countries of the International Monetary Fund (IMF) have experienced important problems with their banks. (Lindgren, Garcia, Saal, 1996) The fact that these crises occurred after implementation of far reaching reforms of the financial system revived long standing debates in Economics and Finance on role of bank regulation. (Mishkin, 1992; McKinnon, 1993) Notably absent in the debate, however, is consideration of the corporate governance of banks and the role it might play in systemic crisis.1 Consideration of corporate governance in banks is, however, apparently easier said than done. While there is a great deal of empirical research on corporate governance, very little of it concerns the behaviour of owners and managers of banks. In addition, there is no clear theoretical path between governance as a microeconomic concept and regulation as a macroeconomic concept. There is, therefore, little guidance as to the conceptual framework that is suitable to understanding governance in banks. This lack of guidance creates a strong theoretical motive for research on these issues. By defining a conceptual framework appropriate to governance in banks, it is possible to contribute to the further development of the microeconomics of banking. Specifically we seek to widen the scope of financial management research so that governance is understood as an integral part of the microeconomic foundations of what is called systemic risk in the banking literature.2 (OECD, 1995; Davis, 1995; Lindgren, Garcia and Saal, 1996) This paper has two aims. The first in to demonstrate the limitations of current approaches to the...
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