Do board characteristics and ownership structure matter for bank non-performing loans? Empirical evidence from US commercial banks

Abstract

This paper aims to study the ability of the corporate governance of banks to reduce non-performing loans. The dynamic panel GMM estimation is applied to 184 US commercial banks over 2000–2013 period. Given that bank-size groups have different risk profiles, the full sample of US banks is divided into three asset-size classes. For every asset-size group of banks, we successively integrate five corporate governance variables in addition to the bank-specific and macroeconomic variables in separate regressions. The central finding of this research is that small banks are characterized by a weak and fragile corporate governance system which leads to a bad loan quality. This result can be explained by small banks’ reliance on personal connections. Concerning medium banks, we notice a sound corporate governance system. As far as large banks are concerned, it is to mention that the corporate governance system of these banks is neutralized. On account of the high level of liquidity, large banks are engaged in excessive lending practices without taking notice of the undue losses. This paper notably contributes to the financial literature via empirically proving that the effect of banks’ corporate governance on their loan quality depends on bank size.

This is a preview of subscription content, access via your institution.

References

  1. Adams, R. B., & Ferreira, D. (2007). A theory of friendly boards. The Journal of Finance, 62(1), 217–250.

    Article  Google Scholar 

  2. Adams, R. B., & Mehran, H. (2012). Bank board structure and performance: Evidence for large bank holding companies. Journal of Financial Intermediation, 21(2), 243–267.

    Article  Google Scholar 

  3. Aebi, V., Sabato, G., & Schmid, M. (2012). Risk management, corporate governance, and bank performance in the financial crisis. Journal of Banking & Finance, 36(12), 3213–3226.

    Article  Google Scholar 

  4. Ahmad, N. H., & Ariff, M. (2007). Multi-country study of bank credit risk determinants. International Journal of Banking and Finance, 5(1), 6.

    Google Scholar 

  5. Ahmed, A. S., Takeda, C., & Thomas, S. (1999). Bank loan loss provisions: A reexamination of capital management, earnings management and signaling effects. Journal of Accounting and Economics, 28(1), 1–25.

    Article  Google Scholar 

  6. Alhassan, A. L., Kyereboah-Coleman, A., & Andoh, C. (2014). Asset quality in a crisis period: An empirical examination of Ghanaian banks. Review of Development Finance, 4(1), 50–62.

    Article  Google Scholar 

  7. Álvarez, A. I. F., Gómez, S., & Méndez, C. F. (1998). The effect of board size and composition on corporate performance. In M. Balling, E. Hennessy, & R. O’Brien (Eds.), Corporate governance, financial markets and global convergence (pp. 1–16). Boston, MA: Springer, US.

    Google Scholar 

  8. Arellano, M., & Bond, S. (1991). Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. The review of economic studies, 58(2), 277–297.

    Article  Google Scholar 

  9. Aver, B. (2008). An empirical analysis of credit risk factors of the Slovenian banking system. Managing Global Transitions, 6(3), 317–334.

    Google Scholar 

  10. Beck, R., Jakubik, P., & Piloiu, A. (2015). Key determinants of non-performing loans: New evidence from a global sample. Open Economies Review, 26(3), 525–550. https://doi.org/10.1007/s11079-015-9358-8.

    Article  Google Scholar 

  11. Bedendo, M., & Bruno, B. (2012). Credit risk transfer in US commercial banks: What changed during the 2007–2009 crisis? Journal of Banking & Finance, 36(12), 3260–3273.

    Article  Google Scholar 

  12. Beltratti, A., & Stulz, R. M. (2012). The credit crisis around the globe: Why did some banks perform better? Journal of Financial Economics, 105(1), 1–17.

    Article  Google Scholar 

  13. Bhagat, S., & Bolton, B. (2019). Corporate governance and firm performance: The sequel. Journal of Corporate Finance, 58, 142–168.

    Article  Google Scholar 

  14. Biekpe, N. (2011). The competitiveness of commercial banks in Ghana. African Development Review, 23(1), 75–87.

    Article  Google Scholar 

  15. Black, L. K., & Hazelwood, L. N. (2013). The effect of TARP on bank risk-taking. Journal of Financial Stability, 9(4), 790–803.

    Article  Google Scholar 

  16. Boudriga, A., Boulila Taktak, N., & Jellouli, S. (2009). Banking supervision and nonperforming loans: A cross-country analysis. Journal of Financial Economic Policy, 1(4), 286–318.

    Article  Google Scholar 

  17. Braham, R., de Peretti, C., & Belkacem, L. (2019). Do political connections affect bank leverage? Evidence from some Middle Eastern and North African countries. Journal of Management and Governance, 23(4), 989–1006.

    Article  Google Scholar 

  18. Brickley, J. A., Coles, J. L., & Jarrell, G. (1997). Leadership structure: Separating the CEO and chairman of the board. Journal of Corporate Finance, 3(3), 189–220.

    Article  Google Scholar 

  19. Burkart, M., Gromb, D., & Panunzi, F. (1997). Large shareholders, monitoring, and the value of the firm. The Quarterly Journal of Economics, 112(3), 693–728.

    Article  Google Scholar 

  20. Byron, K., & Post, C. (2016). Women on boards of directors and corporate social performance: A meta-analysis. Corporate Governance: An International Review, 24(4), 428–442.

    Article  Google Scholar 

  21. Caprio, G., & Levine, R. (2002). Corporate governance in finance: Concepts and international observations (pp. 17–50). Financial sector governance: The roles of the public and private sectors.

    Google Scholar 

  22. Castro, V. (2013). Macroeconomic determinants of the credit risk in the banking system: The case of the GIPSI. Economic Modelling, 31, 672–683.

    Article  Google Scholar 

  23. Chaibi, H., & Ftiti, Z. (2015). Credit risk determinants: Evidence from a cross-country study. Research in International Business and Finance, 33, 1–16.

    Article  Google Scholar 

  24. Coles, J. L., Daniel, N. D., & Naveen, L. (2008). Boards: Does one size fit all? Journal of Financial Economics, 87(2), 329–356.

    Article  Google Scholar 

  25. Cornett, M. M., Li, L., & Tehranian, H. (2013). The performance of banks around the receipt and repayment of TARP funds: Over-achievers versus under-achievers. Journal of Banking & Finance, 37(3), 730–746.

    Article  Google Scholar 

  26. Cornett, M. M., McNutt, J. J., & Tehranian, H. (2009). The financial crisis, internal corporate governance, and the performance of publicly-traded US bank holding companies. Internal Corporate Governance, and the Performance of Publicly-Traded US Bank Holding Companies (January 22, 2009).

  27. Dalton, D. R., Daily, C. M., Johnson, J. L., & Ellstrand, A. E. (1999). Number of directors and financial performance: A meta-analysis. Academy of Management journal, 42(6), 674–686.

    Google Scholar 

  28. De Andres, P., & Vallelado, E. (2008). Corporate governance in banking: The role of the board of directors. Journal of Banking & Finance, 32(12), 2570–2580.

    Article  Google Scholar 

  29. de Lis, S. F., Pagés, J. M., & Saurina, J. (2001). Credit growth, problem loans and credit risk provisioning in Spain. Bank for International Settlements Papers, 1, 331–353.

    Google Scholar 

  30. Džanić, A. (2012). Concentration of ownership and corporate performance: Evidence from the Zagreb Stock Exchange. Financial Theory and Practice, 36(1), 29–52.

    Article  Google Scholar 

  31. Eisenberg, T., Sundgren, S., & Wells, M. T. (1998). Larger board size and decreasing firm value in small firms. Journal of Financial Economics, 48(1), 35–54.

    Article  Google Scholar 

  32. Erkens, D. H., Hung, M., & Matos, P. (2012). Corporate governance in the 2007–2008 financial crisis: Evidence from financial institutions worldwide. Journal of Corporate Finance, 18(2), 389–411.

    Article  Google Scholar 

  33. Fabrizi, M. (2018). Executive compensation in banks: Insights from CEO equity incentives and securitization transactions. Journal of Management and Governance, 22(4), 891–919.

    Article  Google Scholar 

  34. Fahlenbrach, R., & Stulz, R. M. (2011). Bank CEO incentives and the credit crisis. Journal of Financial Economics, 99(1), 11–26.

    Article  Google Scholar 

  35. Fama, E. F., & Jensen, M. C. (1983). Separation of ownership and control. Journal of Law and Economics, 4, 301–325.

    Article  Google Scholar 

  36. Fernández Sánchez, J. L., Odriozola Zamanillo, M. D., & Luna, M. (2020). How corporate governance mechanisms of banks have changed after the 2007–2008 financial crisis. Global Policy, 11, 52–61.

    Article  Google Scholar 

  37. Florackis, C., & Ozkan, A. (2009). The impact of managerial entrenchment on agency costs: An empirical investigation using UK panel data. European Financial Management, 15(3), 497–528.

    Article  Google Scholar 

  38. Fofack, H. (2005). Nonperforming loans in Sub-Saharan Africa: causal analysis and macroeconomic implications. World Bank Policy Research Working Paper (3769).

  39. Ghosh, A. (2015). Banking-industry specific and regional economic determinants of non-performing loans: Evidence from US states. Journal of Financial Stability, 20, 93–104.

    Article  Google Scholar 

  40. Grove, H., Patelli, L., Victoravich, L. M., & Xu, P. T. (2011). Corporate governance and performance in the wake of the financial crisis: Evidence from US commercial banks. Corporate Governance: An International Review, 19(5), 418–436.

    Article  Google Scholar 

  41. Hanafi, M. M., & Santi, F. (2013). The impact of ownership concentration, commissioners on bank risk and profitability: Evidence from Indonesia. Eurasian Economic Review, 3(2), 183–202.

    Article  Google Scholar 

  42. Harris, M., & Raviv, A. (2008). A theory of board control and size. Review of Financial Studies, 21(4), 1797–1832.

    Article  Google Scholar 

  43. Hasan, I., & Wall, L. D. (2004). Determinants of the loan loss allowance: Some cross-country comparisons. Financial Review, 39(1), 129–152.

    Article  Google Scholar 

  44. Hermalin, B. E., & Weisbach, M. S. (1988). The determinants of board composition. The RAND Journal of Economics, 15, 589–606.

    Article  Google Scholar 

  45. Hu, J. L., Li, Y., & Chiu, Y. H. (2004). Ownership and nonperforming loans: Evidence from Taiwan’s banks. The Developing Economies, 42(3), 405–420.

    Article  Google Scholar 

  46. Huse, M. (2005). Accountability and creating accountability: A framework for exploring behavioural perspectives of corporate governance. British Journal of Management, 16, S65–S79.

    Article  Google Scholar 

  47. Iannotta, G., Nocera, G., & Sironi, A. (2007). Ownership structure, risk and performance in the European banking industry. Journal of Banking & Finance, 31(7), 2127–2149.

    Article  Google Scholar 

  48. Jensen, M. C. (1993). The modern industrial revolution, exit, and the failure of internal control systems. The journal of finance, 48(3), 831–880.

    Article  Google Scholar 

  49. Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360.

    Article  Google Scholar 

  50. Jin, J. Y., Kanagaretnam, K., & Lobo, G. J. (2011). Ability of accounting and audit quality variables to predict bank failure during the financial crisis. Journal of Banking & Finance, 35(11), 2811–2819.

    Article  Google Scholar 

  51. John, K., De Masi, S., & Paci, A. (2016). Corporate governance in banks. Corporate Governance: An International Review, 24(3), 303–321.

    Article  Google Scholar 

  52. Kishan, R. P., & Opiela, T. P. (2000). Bank size, bank capital, and the bank lending channel . Journal of Money, Credit and Banking, 32(121), 141.

    Google Scholar 

  53. Klein, N. (2013). Non-performing loans in CESEE: Determinants and impact on macroeconomic performance. IMF Working Papers, 13(72), 1–27.

    Article  Google Scholar 

  54. Koutsomanoli-Filippaki, A., Margaritis, D., & Staikouras, C. (2012). Profit efficiency in the European Union banking industry: A directional technology distance function approach. Journal of Productivity Analysis, 37, 277–293.

    Article  Google Scholar 

  55. Laeven, L. (2013). Corporate governance: what’s special about banks? Annu. Rev. Financ. Econ., 5(1), 63–92.

    Article  Google Scholar 

  56. Levine, R. (2004). The corporate governance of banks: A concise discussion of concepts and evidence (Vol. 3404). Geneva: World Bank Publications.

    Google Scholar 

  57. Liang, Q., Xu, P., & Jiraporn, P. (2013). Board characteristics and Chinese bank performance. Journal of Banking & Finance, 37(8), 2953–2968.

    Article  Google Scholar 

  58. Lipton, M., & Lorsch, J. W. (1992). A modest proposal for improved corporate governance. The Business Lawyer, 48, 59–77.

    Google Scholar 

  59. Louzis, D. P., Vouldis, A. T., & Metaxas, V. L. (2012). Macroeconomic and bank-specific determinants of non-performing loans in Greece: A comparative study of mortgage, business and consumer loan portfolios. Journal of Banking & Finance, 36(4), 1012–1027.

    Article  Google Scholar 

  60. Love, I., & Rachinsky, A. (2015). Corporate governance and bank performance in emerging markets: Evidence from Russia and Ukraine. Emerging Markets Finance and Trade, 51(sup2), S101–S121.

    Article  Google Scholar 

  61. Lu, W., & Whidbee, D. A. (2013). Bank structure and failure during the financial crisis. Journal of Financial Economic Policy, 5(3), 281–299.

    Article  Google Scholar 

  62. Lu, W., & Whidbee, D. A. (2016). US bank failure and bailout during the financial crisis: Examining the determinants of regulatory intervention decisions. Journal of Financial Economic Policy, 8(3), 316–347.

    Article  Google Scholar 

  63. Luo, D., & Ying, Q. (2014). Political connections and bank lines of credit. Emerging Markets Finance and Trade, 50(sup3), 5–21.

    Article  Google Scholar 

  64. Minton, B. A., Taillard, J. P., & Williamson, R. (2014). Financial expertise of the board, risk taking, and performance: Evidence from bank holding companies. Journal of Financial and Quantitative Analysis, 49(02), 351–380.

    Article  Google Scholar 

  65. Nikolaidou, E., & Vogiazas, S. (2014). Credit risk determinants for the Bulgarian banking system. International Advances in Economic Research, 20(1), 87–102. https://doi.org/10.1007/s11294-013-9444-x.

    Article  Google Scholar 

  66. Nkusu, M. (2011). Nonperforming loans and macrofinancial vulnerabilities in advanced economies. IMF Working Papers, 1–27.

  67. O’Sullivan, J., Mamun, A., & Hassan, M. K. (2015). The relationship between board characteristics and performance of bank holding companies: Before and during the financial crisis. Journal of Economics and Finance, 40, 1–34.

    Google Scholar 

  68. Pathan, S. (2009). Strong boards, CEO power and bank risk-taking. Journal of Banking & Finance, 33(7), 1340–1350.

    Article  Google Scholar 

  69. Prowse, S. (1997). Corporate control in commercial banks. Journal of Financial Research, 20(4), 509–527.

    Article  Google Scholar 

  70. Quagliariello, M. (2007). Banks’ riskiness over the business cycle: A panel analysis on Italian intermediaries. Applied Financial Economics, 17(2), 119–138.

    Article  Google Scholar 

  71. Rajan, R., & Dhal, S. C. (2003). Non-performing loans and terms of credit of public sector banks in India: An empirical assessment. Reserve Bank of India Occasional Papers, 24(3), 81–121.

    Google Scholar 

  72. Salas, V., & Saurina, J. (2002). Credit risk in two institutional regimes: Spanish commercial and savings banks. Journal of Financial Services Research, 22(3), 203–224.

    Article  Google Scholar 

  73. Seijts, G., Byrne, A., Crossan, M. M., & Gandz, J. (2019). Leader character in board governance. Journal of Management and Governance, 23(1), 227–258.

    Article  Google Scholar 

  74. Sheedy, E., & Griffin, B. (2018). Risk governance, structures, culture, and behavior: A view from the inside. Corporate Governance: An International Review, 26(1), 4–22.

    Article  Google Scholar 

  75. Shehzad, C. T., de Haan, J., & Scholtens, B. (2010). The impact of bank ownership concentration on impaired loans and capital adequacy. Journal of Banking & Finance, 34(2), 399–408.

    Article  Google Scholar 

  76. Shleifer, A., & Vishny, R. W. (1997). A survey of corporate governance. The Journal of Finance, 52(2), 737–783.

    Article  Google Scholar 

  77. Stern, G. H., & Feldman, R. J. (2004). Too big to fail: The hazards of bank bailouts. Washington: Brookings Institution Press.

    Google Scholar 

  78. Stiroh, K. J., & Metli, C. (2003). Now and then: the evolution of loan quality for US banks. Current Issues in Economics and Finance, 9(4), 61.

    Google Scholar 

  79. Sun, J., Cahan, S. F., & Emanuel, D. (2009). Compensation committee governance quality, chief executive officer stock option grants, and future firm performance. Journal of Banking & Finance, 33(8), 1507–1519.

    Article  Google Scholar 

  80. Sun, Y. (2018). CEO compensation and mortgage origination in the banking industry. Corporate Governance: An International Review, 26, 273–292.

    Article  Google Scholar 

  81. Switzer, L. N., & Wang, J. (2013). Default risk estimation, bank credit risk, and corporate governance. Financial Markets, Institutions & Instruments, 22(2), 91–112.

    Article  Google Scholar 

  82. Tarchouna, A., Jarraya, B., & Bouri, A. (2017). How to explain non-performing loans by many corporate governance variables simultaneously? A corporate governance index is built to US commercial banks. Research in International Business and Finance, 42, 645–657. https://doi.org/10.1016/j.ribaf.2017.07.008.

    Article  Google Scholar 

  83. Tarchouna, A., Jarraya, B., & Bouri, A. (2019a). Shadow prices of non-performing loans and the global financial crisis. The Journal of Risk Finance, 20, 411–434.

    Article  Google Scholar 

  84. Tarchouna, A., Jarraya, B., & Bouri, A. (2019b). To what extent the global financial crisis deteriorated loan quality of US commercial banks? International Journal of Management and Enterprise Development, 18(1/2), 63–84.

    Article  Google Scholar 

  85. Wheelock, D. C., & Wilson, P. W. (1999). Technical progress, inefficiency, and productivity change in US banking, 1984–1993. Journal of Money, Credit, and Banking, 48, 212–234.

    Article  Google Scholar 

  86. Yermack, D. (1996). Higher market valuation of companies with a small board of directors. Journal of Financial Economics, 40(2), 185–211.

    Article  Google Scholar 

  87. Young, M. N., Peng, M. W., Ahlstrom, D., Bruton, G. D., & Jiang, Y. (2008). Corporate governance in emerging economies: A review of the principal–principal perspective. Journal of management studies, 45(1), 196–220.

    Article  Google Scholar 

  88. Zagorchev, A., & Gao, L. (2015). Corporate governance and performance of financial institutions. Journal of Economics and Business, 16, 203–216.

    Google Scholar 

  89. Zona, F., & Zattoni, A. (2007). Beyond the black box of demography: Board processes and task effectiveness within Italian firms. Corporate Governance: An International Review, 15(5), 852–864.

    Article  Google Scholar 

Download references

Author information

Affiliations

Authors

Corresponding author

Correspondence to Ameni Tarchouna.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Rights and permissions

Reprints and Permissions

About this article

Verify currency and authenticity via CrossMark

Cite this article

Tarchouna, A., Jarraya, B. & Bouri, A. Do board characteristics and ownership structure matter for bank non-performing loans? Empirical evidence from US commercial banks. J Manag Gov (2021). https://doi.org/10.1007/s10997-020-09558-2

Download citation

Keywords

  • Non-performing loans
  • Bank corporate governance
  • Board characteristics
  • Ownership structure
  • Bank size
  • GMM dynamic panel data estimator