Corporate Governance: What’s Special About Banks?

This review surveys the literature on the corporate governance of banks. Traditional corporate governance mechanisms, such as concentrated ownership and takeover threats, in principle, also apply to banks. However, banks have special traits and are heavily regulated, preventing natural forms of governance to arise and rendering many of these governance mechanisms ineffective. Financial regulation can in principle compensate for weaknesses in corporate governance but in practice has had limited effectiveness in protecting the interests of banks’ stakeholders, because of, for instance, unproductive interactions between regulatory restraints and existing governance arrangements. The review concludes with a discussion of corporate governance and regulatory reforms to enhance the safety and soundness of banks. These proposals range from placing more emphasis on value creation for bank stakeholders other than shareholders to reducing risk-shifting incentives for bank managers and shareholders.