Relevance of corporate governance to credit risk analysis in financial institutions

Abstract

The purpose of this study was to analyze whether the adoption of corporate governance (CG) by firms applying for loans is relevant to the process of credit analysis in financial institutions. The investigation consisted of an exploratory, qualitative multiple-case study of three of the five Brazil's largest financial institutions: Banco Itaú, Banco do Brasil e BNDES, with in-depth semi-structured interviews. The study used as analysis categories the CG practices recommended by International Finance Corporation-IFC (CG tools for listed and unlisted firms), Brazilian Institute of Corporate Governance-IBGC, Brazilian Securities and Exchange Commission-CVM, Brazilian Stock Exchange-BM&FBovespa (GC rules for Level 1, Level 2 and New Market listing segments). In the point of view of the interviewed, from a list of the 21 CG practices, organized into five groups, 10 practices were considered extremely relevant, 8 very relevant, and 3 few relevant. Among the five subcategories of analysis, the one assigned the highest average rank of relevance was "transparency and disclosure", followed in decreasing order by "control environment and process", "treatment of minority shareholders", "commitment to corporate governance", and "structure and functioning of the board of directors". The sampled banks did not have special lines of credit for firms practicing CG, but the adoption of such practices was considered very or extremely relevant in the process of credit risk analysis and favored access to differentiated levels of financing and/or reduced rates. The study contributes to the literature on the association between CG practices, access to financing and financing costs, by testing whether CG practices are deemed relevant to the process of credit risk analysis and whether the adoption of such practices provides access to differentiated levels of credit and/or reduced lending rates in three major Brazilian banks.

The Role of Corporate Governance and Risk Management on Banking Financial Performance in Indonesia

“…The results of this study are relevant to previous research conducted by Arif & Anees (2012), Poudel (2012), Roziq & Danurwenda (2012), Oliveira et al (2014), Permatasari & Novitasary (2014), Badriyah, Sari, & Basri (2015, Joeswanto & Malelak (2015), and Setiawaty (2016), which has found a relationship and effect between corporate governance and financial performance, either directly or indirectly.…”

“…These findings supported the previous research by Permatasari & Novitasary (2014) which showed that corporate governance had the effect on risk management. Those results emphasized by Oliveira et al (2014) which explain that bank give the loans to companies that adopt the good corporate governance, while the corporate governance application is considered highly relevant in the process of credit risk assessment.…”

“…This is contrast to the research by Aebi, Sabato, & Schmid (2012), Poudel (2012), and Hassan & Halbouni (2013), which stated that corporate governance practiced have no significant effect on financial performance. Furthermore, related to the effect of corporate governance on credit risk, Oliveira et al (2014) and Permatasari & Novitasary (2014), found that corporate governance had a significant effect on risk management. This finding is contrast to the Rachdi, Trabelsi, & Trad (2013) who found that corporate governance has no effect on credit risk.…”