investment, and for contesting corporate governance. In Germany, where the stock market has historically been small, banks hold … equity stakes in firms and have proxy voting rights over other agents' shares. In addition, banks lend to firms and have … representatives on corporate boards. If a banking relationship is a substitute for the stock market, then interaction with a bank …

This paper examines how governance and risk management affect risk-taking in banks. It distinguishes between good risks …, which are risks that have an ex ante private reward for the bank on a stand-alone basis, and bad risks, which do not have … such a reward. A well-governed bank takes the amount of risk that maximizes shareholder wealth subject to constraints …