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How do banks make the trade-offs among risks? The role of corporate governance

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  • Chen, Hsiao-Jung
  • Lin, Kuan-Ting
Abstract
This study analyzes the role of corporate governance in the relationship among credit, interest rate, and liquidity risks encountered by banks. In particular, the study investigates how banks make the trade-offs among these risks under the maturity transformation business model. The sample consists of banks in 43 countries over the period of 2002–2010. Results show that credit, interest rate, and liquidity risks are related to one another, and that the interactions among them can be reduced by corporate governance and regulations. During the regular yield curve spread (YCS) period, management-controlled banks take less credit risk and even less liquidity risk whereas shareholder-controlled banks encounter more liquidity risk as they pursue more interest rate risk. During the inverted YCS period, management-controlled banks still opt for less credit risk-taking, but shareholder-controlled banks are greatly exposed to risks and should thus be monitored by concerned authorities.

Suggested Citation

  • Chen, Hsiao-Jung & Lin, Kuan-Ting, 2016. "How do banks make the trade-offs among risks? The role of corporate governance," Journal of Banking & Finance, Elsevier, vol. 72(S), pages 39-69.
    • Handle: RePEc:eee:jbfina:v:72:y:2016:i:s:p:s39-s69
    DOI: 10.1016/j.jbankfin.2016.05.010
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    More about this item

    Keywords

    Bank; Corporate governance; Credit risk; Interest rate risk; Liquidity risk;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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