Risk Taking and Corporate Governance in the New Bank Regulatory Requirements
Risk Taking and Corporate Governance in the New Bank Regulatory Requirements

Author(s): Eugenia Schmitt
Subject(s): Business Economy / Management, Governance, Financial Markets
Published by: Masarykova univerzita nakladatelství
Keywords: Corporate governance; banks; regulation; risk-taking; moral hazard;
Summary/Abstract: The financial crisis (2008) and the sovereign debt crisis (2011) have revealed that excessive risk-taking and unethical corporate cultures constitute risks for the global financial system. Apparently, globally significant financial institutions need to change some of their fundamental ethical norms and behaviours. Large information asymmetries, opaqueness and complexities characterize the banking sector. Hence, to establish an effective corporate governance is a crucial determinant of success or failure as well as for maintaining financial stability. New macroprudential capital requirements have been phased-in, in successive steps across the 28 European Union (EU) countries starting in 2014. The Capital Requirements Regulation (CRR) and the Capital Requirements Directive (CRD IV) have introduced a new macroprudential framework transposing the Basel III agreement in the EU. Stricter rules on capital adequacy, as well as new corporate governance and remuneration rules were enclosed. Banks should be encouraged to take acceptable levels of risks while minimizing the likelihood of bankruptcy. The principal-agent theory shows that the presence of imperfect information may be represented as moral hazard caused by the existence of distorted incentives between the principal and the agent.

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