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When do regulations matter for bank risk-taking? An analysis of the interaction between external regulation and board characteristics

When do regulations matter for bank risk-taking? An analysis of the interaction between external regulation and board characteristics
When do regulations matter for bank risk-taking? An analysis of the interaction between external regulation and board characteristics
Purpose
According to previous international studies, the impact of external regulation on bank risk is ambiguous. The purpose of this paper is to ask the question, “When do regulations matter for bank risk-taking?” by reporting the first empirical investigation of how the relation between bank regulations (capital requirements, official supervisory power and market discipline) and bank risk-taking is moderated by board monitoring characteristics.

Design/methodology/approach
Using SYS-GMM, the analysis of the interaction between bank-level boards of directors’ attributes (board size, board independence and board gender diversity) and external regulation is based on a sample of 493 banks operating in 54 countries over 2001-2015, accounting for three measures of bank risk-taking.

Findings
Regulations matter for bank risk-taking conditional on board characteristics: board size, board independence and board diversity. With the exception of capital requirements, the market discipline exerted by external private monitoring and greater supervisory power are unable to mitigate the propensity to greater risk-taking by banks resulting from larger board size, higher board independence and greater gender diversity of the board.

Originality/value
The bank risk empirical literature is still silent as to the interaction between board governance and regulation for the purpose of examining banks’ risk-taking. This paper fills this gap, thus making a significant contribution by extending our knowledge of whether and how board governance moderates the relationship between external regulation and bank risk-taking.
Regulation, Corporate governance, Banks, Board of directors, Risk-taking
1472-0701
440-461
De Vita, Glauco
002fc6bf-e5ed-4a13-8993-0ce5e1fc2005
Luo, Yun
2ac0f228-573d-43e7-b309-1529b6f3d174
De Vita, Glauco
002fc6bf-e5ed-4a13-8993-0ce5e1fc2005
Luo, Yun
2ac0f228-573d-43e7-b309-1529b6f3d174

De Vita, Glauco and Luo, Yun (2018) When do regulations matter for bank risk-taking? An analysis of the interaction between external regulation and board characteristics. Corporate Governance, 18 (3), 440-461. (doi:10.1108/CG-10-2017-0253).

Record type: Article

Abstract

Purpose
According to previous international studies, the impact of external regulation on bank risk is ambiguous. The purpose of this paper is to ask the question, “When do regulations matter for bank risk-taking?” by reporting the first empirical investigation of how the relation between bank regulations (capital requirements, official supervisory power and market discipline) and bank risk-taking is moderated by board monitoring characteristics.

Design/methodology/approach
Using SYS-GMM, the analysis of the interaction between bank-level boards of directors’ attributes (board size, board independence and board gender diversity) and external regulation is based on a sample of 493 banks operating in 54 countries over 2001-2015, accounting for three measures of bank risk-taking.

Findings
Regulations matter for bank risk-taking conditional on board characteristics: board size, board independence and board diversity. With the exception of capital requirements, the market discipline exerted by external private monitoring and greater supervisory power are unable to mitigate the propensity to greater risk-taking by banks resulting from larger board size, higher board independence and greater gender diversity of the board.

Originality/value
The bank risk empirical literature is still silent as to the interaction between board governance and regulation for the purpose of examining banks’ risk-taking. This paper fills this gap, thus making a significant contribution by extending our knowledge of whether and how board governance moderates the relationship between external regulation and bank risk-taking.

Other
Accepted_CG_article_by_G_De_Vita_Y_Luo_23_Dec_2017 - Accepted Manuscript
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More information

Accepted/In Press date: 23 December 2017
e-pub ahead of print date: 24 January 2018
Published date: June 2018
Keywords: Regulation, Corporate governance, Banks, Board of directors, Risk-taking

Identifiers

Local EPrints ID: 438346
URI: http://eprints.soton.ac.uk/id/eprint/438346
ISSN: 1472-0701
PURE UUID: d328964c-b61b-4d9e-a75e-c010d70ecd94
ORCID for Yun Luo: ORCID iD orcid.org/0000-0001-8409-366X

Catalogue record

Date deposited: 06 Mar 2020 17:30
Last modified: 11 Mar 2022 03:01

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Contributors

Author: Glauco De Vita
Author: Yun Luo ORCID iD

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