Governance Structure, Risk an Performance in the European Banking Sector: an Empirical Analysis

Implementing safe and sound corporate governance practices in the banking sector has become a central topic for the international regulators during the recent past. In particular, the Basel Committee on Banking Supervision, after recognizing two main alternative governance structures (two-tier board vs. one-tier board), states that the particular legal framework adopted by banks should not impede the application of sound corporate governance practices. By analyzing a sample of listed banks from the Euro-zone and UK over the period from January 2003 -November 2010, this paper investigates whether and to what extent there is a connection between the particular corporate governance structure, their risk and their financial and operating performance, especially during the recent financial crisis. Primary results suggest that, especially during the crisis of 2007-2009, the banks adopting the two-tier structure were less exposed to the bankruptcy risk with respect to the banks that adopted the one-tier structure; moreover, the strategy of buying the banks with a two-tier board structure and short selling the one-tier structure banks earned a positive abnormal return of about 6.36% per year.