TIPOS DE GAS NO CONVENCIONAL

The nature of banks’ business activities have systemic importance due to their size, interconnectedness, complexity and lack of substitutability (BCBS, 2013; Ellis et al., 2014). The risk-taking behaviour of banks is associated with financial insecurity and economic

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frailness as asserted by Bernanke (1983) and Keeley (1990). The question about how risk-taking is shaped within banks has interested more researchers, experts and regulators coinciding with the growing number of financial and economic crises since the late 1980s until the most disrupting turmoil of 2007-2008. The exploration inevitably leads to the concept of corporate governance whereby organizations define how the corporate decisions are made, the way authority and responsibility are allocated and the methods of attaining the corporation’s objectives (BCBS, 2015b). Or as Stulz (2014) asserts, governance enables the distinction between the good risks that have an ex ante private reward for the bank on a standalone basis and maximizes the shareholders wealth, and the bad risks which do not yield such reward. Therefore, the role of risk management cannot be dissociated from the corporate governance structure and mechanisms in the specific case of banks as failures in setting sensible risk appetite echelons and mishandling the methods and processes to increase the institution’s value are very likely to engender severe consequences at macro levels. An illustration of this is provided by the OECD (2009) which finds that failures in risk management were one of the greatest underlying causes of the financial crisis. OECD (2009) asserts that the requirement for financial institutions and particularly for banks to cautiously manage risks is more stringent as the volatility of their risks tend to be greater due to maturity transformation and the potential systemic risk it can induce.

Acknowledging the impairments and weaknesses of the risk management functions that contributed to the systemic risks of 2008, several international multilateral bodies such as the Basel Committee for Banking Supervision, the Financial Stability Board (FSB), the OECD and the IMF published a rich corpus of principles and guidelines to improve the practices in bank corporate governance in general (BCBS, 2015a, 2015b; IMF, 2009; OECD, 2009, 2015) and in risk governance in particular (FSB, 2013a).

Academic literature on the impact of corporate governance on bank’s risk-taking as well as financial stability has similarly emerged with renewed interest following the global financial turmoil. Laeven and Levine (2009) for instance were first to empirically assess the governance theories pertaining to risk-taking by banks. The authors looked at the potential conflicts between the bank managers and the shareholders over risk-taking and whether risk-taking varies with the comparative power of equity holders. They also examined whether the national regulations and bank risks depend on ownership structure. Their main findings suggest that banks with large and powerful owners with substantial cash-flow rights tend to engage in higher risk in line with theory. They also find that banks with powerful equity holders respond to stricter capital

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regulations and activity restrictions by taking greater risk as a way of compensation for the utility loss stemming from these two bank regulations’ proxies. The same type of owners is also prone to tolerate more risk when the country has formal deposit insurance compared to those without explicit deposit insurance.

A review of the theory of bank governance has been done by Becht et al (2011) who also investigated the latent correlation between the banks’ failure during the crisis and their organizational forms shaped by their corporate governance structures. The authors surveyed the post-crisis empirical literature on the core failures in governance specifically related to board independence, ownership and control as well as executive compensation and internal controls. Becht et al ( 2011) argue that overall bank corporate governance should be broadened to appropriately consider the interests of other constituencies in addition to ones of the shareholders, all of which are at risk from banks’ activities. In fact more than a decade before the GFC, Dewatripont and Tirole (1994) recommended in their “representation hypothesis” that corporate governance features of non-financial corporations should be similarly applied to banks as well as insurance companies and pension funds. This signifies that corporate governance in these financial firms should represent and target the protection of the debtholders besides the shareholders’ interests. Likewise, Becht et al (2011) maintain that this can be achieved by empowering the depositors and other creditors, transaction counterparties and, taxpayers by their adequate representation within the board of directors. In terms of remuneration reform, they assert that it must be adjusted for risk and directly aligned with debt holders rather than with shareholders.

Similarly, Dewatripont et al (2010) highlight from their extended diagnosis of the financial meltdown that key prudential reforms should include some corporate governance reforms. For instance, they argue that to restrain the risk-taking incentives of the managers, it is necessary to implement adequate internal governance measures and risk management systems along with some control over the senior management’s remuneration. The authors estimate that regrettably these issues that monitor risk-taking behaviour remained vague and were not given the required importance in Pillar 2 of the Basel II accords. Yet regrettably, even with Basel III reforms and enhancement of Pillar 2 little headway has been made as argued by Ellis et al. (2014). In a detailed exploration of the nexus between bank governance systemic risk and financial stability, Ellis et al. (2014) discuss three important risk-taking incentives by managers which are anchored in bank corporate governance mechanisms. These are shaped in three distinct “principal-agent” problems. The first principal-agent problem arises through the payoff

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asymmetry between the shareholders and the debtholders. In fact, equity-holders perceive their payoffs as an out of money call option on the bank’s assets with a strike price given by its debt liabilities. When the level of debt liabilities (deposits and wholesale funding) is high combined with thin capital base and exceeds the total assets, the bank is likely to become balance sheet insolvent in the case large amounts of loans default and capital is depleted to cover the unexpected losses (Farag et al., 2013). Therefore, to boost the equity payoffs, the authors assert that they opt for either more investment in riskier assets or by leveraging them. Either alternative causes the risk exposure to increase disfavouring the debt-holders. The second principal-agent problem is the well-known divergence of interests of the shareholders and the managers. However, this issue has long been overcome by aligning the compensation of the latter with the objectives of the former. As banks’ managers are heavily rewarded by equity, they have increased incentives to engage in riskier activities and for risk-shifting in stressed times. The last principal-agent problem arises between the debtholders and the society. Since governments pursue bail-out policies, the debtholders are inclined to exercise less disciplinary measures on banks’ managers who are continually incentivised to take on more risk as explained earlier. If the state offers explicit insurance to depositors and implicit insurance to investors, the expected corrective effect from the investors on the banks’ managers is totally dismissed (Merton, 1977). Consequently, the state and hence the taxpayers bear the ensuing repercussions. For Ellis et al. (2014), some solutions to these risk-taking incentives that exist in the bank governance entail: increasing regulatory capital to reduce the risk exposure of debtholders, shifting the compensation packages of managers from equity to debt through deferred or clawed-back rewards and substituting the bail-out state policies by bailing-in the creditors. Although the authors acknowledge that most of these solutions have been already proposed in Basel III reforms and by the Financial Stability Board and in a few jurisdictions they are being implemented (Ellis et al., 2014, p. 180), their consistency on how well they can efficiently curb the risk-taking incentives are controversial. One last suggestion they put forward is to amend the structure of the company law in a way that broadens the control rights to the banks’ stakeholders instead of the shareholders solely.

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