The corporate governance of banks
| Date | 01 October 2006 |
| Published date | 01 October 2006 |
| Pages | 375-382 |
| DOI | https://doi.org/10.1108/13581980610711144 |
| Author | Andy Mullineux |
| Subject Matter | Accounting & finance |
FEATURE ARTICLE
The corporate governance
of banks
Andy Mullineux
Department of Accounting and Finance, The Birmingham Business School,
The University of Birmingham, Birmingham, UK
Abstract
Purpose – To consider the implications of the banks fiduciary duty to their depositors (as well as the
shareholders) and the government’s fiscal duty to taxpayers (in the presence of deposit insurance) for
the corporate governance (CG) of banks.
Design/methodology/approach – Recent contributions to the literature are outlined and assessed
in the context of the asymmetric information literature relating to banking.
Findings – The good CG of banks requires regulation to balance the interests of depositors and
taxpayers with those of the shareholders.
Originality/value – Linking the bank regulation in literature based on information asymmetry to
the CG literature.
Keywords Banks, Corporategovernance, Regulation
Paper type Viewpoint
Introduction
Banks are special because their managers have a fiduciary duty to (more risk averse)
depositors as well as (more risk prone) shareholders and thus a solution to the
“principal-agent problem” aimed at maximising shareholder value is inappropriate.
Further, banks are the most important source of external finance, especially for small
and medium enterprises (SMEs), and thus play a key role in allocating capital and the
corporate governance (CG) of non-financial firms. Further, they are at the core of
payments systems and so systemic crises are very costly. Depositor protection helps
reduce the risk of systemic crises, but at the cost of increasing moral hazard and
adverse selection; requiring the government to protect taxpayers against abuse by
banks taking excessive risk. Good regulation, aimed at curbing excessive risk taking,
thus becomes a cornerstone of the good governance of banks. This argument can be
extended to other financial firms given their fiduciary duty to retail savers as well as
shareholders.
The contributions of Macey and O’Hara (2003) and Levine (2003) to the literature on
the CG of banks are reviewed and their recommendations assessed and placed within
the context of the literature on asymmetric information in banking. The implications
for Basel II’s “three pillars” in developed and developing countries and other related
issues are then considered before policy conclusions are drawn.
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1358-1988.htm
The research leading to this paper was undertaken with the support of the EU Asia-Link
Programme (Asialink/ASIE/B7-3010/2005/105-139).
The corporate
governance of
banks
375
Journal of Financial Regulation and
Compliance
Vol. 14 No. 4, 2006
pp. 375-382
qEmerald Group Publishing Limited
1358-1988
DOI 10.1108/13581980610711144
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