Risk and Efficiency in European Banking — Does Corporate Governance Matter?

Abstract

Recent regulatory developments and implementations, such as the GL44 (EBA, 2011) and Basel II/III accords, are steps toward the further development of strategies for more all-embracing and more-detailed regulation to reduce bank risk and to operate banks more properly. Before, and especially after, the financial crisis of 2007 and 2008, several regulatory initiatives were initiated to reduce risk within the banking industry. The Basel I accord emphasized capital regulation, whereas Basel II and III include capital regulation and matters of managerial responsibility in terms of organizational, supervisory and market disciplinary motives for risk governance. In this respect, the upcoming regulatory efforts devote even more detailed attention to internal control mechanisms. For instance, ‘Trust in the reliability of the banking system is crucial for its proper functioning and a prerequisite if it is to contribute to the economy as a whole. Consequently, effective internal governance arrangements are fundamental if institutions, individually, and the banking system, are to operate well’ (EBA, 2011, 3). By emphasising the ‘corporate structure and organization’ (to avoid possibilities to use non-supervised structures), the ‘management body’ (to emphasize an identified problem related to bank oversight), ‘risk management frameworks’, ‘internal control’, ‘systems and continuity’ (comprising guidelines on information and communication) and ‘transparency’ (including public disclosure), the GL44 aims for a more resilient banking system (EBA 2011, 4–6).