Risky Lending: Does Bank Corporate Governance Matter?

Abstract

We study the effect of bank governance on risk-taking in commercial lending. Banks with more effective boards are less likely to lend to riskier borrowers. This effect is restricted to periods of distress in the banking industry. Banks with more effective boards are less likely to lend to riskier borrowers right after the Russian default, which led to exogenously imposed distress on U.S. banks. This relation is stronger at banks with board-level credit committees. Thus, value-maximizing banks may ration credit to riskier borrowers precisely when such firms might be credit-constrained, suggesting that bank governance regulations may have potential unintended consequences.