Credit booms and busts in emerging markets

Abstract

We investigate to what extent corporate governance and risk management mitigate the involvement of banks in credit boom and bust cycles. We study a unique, hand‐collected dataset covering 156 banks from Central and Eastern Europe during 2005–2012. We document that stronger risk management is associated with more moderate pre‐crisis credit growth but not with fewer credit losses in the crisis. With respect to bank governance, we find that a higher share of foreign members on the supervisory board is associated with less rapid credit growth in the pre‐crisis period and a lower level of credit losses during the crisis period.

Corporate board and default risk of financial firms

“…Likewise, the empirical evidence on the effect of board size on default risk for financial firms is mixed. Switzer et al (2018), Fel ıcio et al (2018, John and Ogechukwu (2018) and Baklouti et al (2016) find a positive effect; Andries and Brown (2017) and Akwaa-Sekyi and Moreno (2017) find no effect; while a negative effect is found by Lu and Boateng (2018) and Fields et al (2012).…”

“…Most of the empirical evidence shows a negative relationship between the percentage of independent directors in financial firms and credit risk (Fields et al, 2012;Switzer et al, 2018). However, other authors obtain a positive effect (Lu & Boateng, 2018) or even a null effect (Andries & Brown, 2017;Anginer et al, 2018;Simpson & Gleason, 1999). We formulate the following hypothesis: H2: Board independence is negatively related to default risk in European financial firms.…”

“…Furthermore, banks have a financial safety net that supports them when they are bankrupt, as demonstrated in the 2007-2008 crisis when different banks worldwide were bailed out (Anginer et al, 2018). Likewise, Andries and Brown (2017) highlight that financial companies are subject to external governance mechanisms by states and regulators that can limit risk-taking even if internal governance mechanisms are weak. Fel ıcio et al (2018) highlights that in financial firms the agency problem is different from that in non-financial firms.…”

“…Financial firms have special features and are subject to a strong regulatory framework, which may mean that the mechanisms of internal corporate governance are conditioned by this external regulation (Andries & Brown, 2017) and may give rise to different relationships than those obtained for non-financial companies. All this, together with the impact that financial firms' failure may have on the whole financial system, has increased the need to deepen the relationship between the internal corporate governance mechanisms of financial companies and risk taking.…”

Financial Infrastructure and Access to Finance for European SMEs

“…Starting in 2000, the European banking sectors experienced an extraordinary credit boom, which ended abruptly with the financial crisis of 2008 [44]. We test for the heterogeneity across countries, grouping the investigated countries based on the post-crisis economic environment.…”