The Complementarity of Regulatory and Internal Governance Mechanisms in Banks

Decisions taken by the manager of a bank are subject to the regulatory discipline of the Basel Committee in conjunction with the supervisory discipline of the Board of Directors, a body that represents shareholders. This research demonstrates that the two types of discipline act in complement to each other, whereas the extant literature shows that regulatory discipline is replacing the internal discipline exercised by the Board of Directors. We also show that these internal and external governance mechanisms are relevant to explain the simultaneous influences between financial performance, risk-taking and the capitalization of French banks from 1998 to 2004.