“Corporate Governance and Excessive Risk-Taking in Banks: Lessons from Spain”
by Özlem Akın
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Meeting ID: 337 069 8252
Using a unique borrower-lender matched dataset on mortgage loans in Spain and a novel hand collected data on top executives’ education, experience, and political connection, we explore the effect of board characteristics on bank’s excessive risk-taking behavior. We find that having better educated and more experienced executives leads to lower risk-taking in banks. We further investigate the relationship between board characteristics and over-appraisal behavior. In the Spanish case, the fact that appraisal companies were mostly owned by banks led to a situation in which the LTV limits were used to generate appraisal values adjusted to the needs of the clients, rather than trying to appropriately represent the value of the property. Our results indicate that this tendency towards over-appraisal will be lower in banks headed by more experienced and better educated executives. Finally, we examine the effect of corruption on over-appraisal behavior. We consider over-appraisal as a type of fraud and test whether in regions with higher corruption level fraud increases. Our results confirm this hypothesis. We observe higher over-appraisal in banks whose head office is in a region with lower transparency levels and higher levels of corruption. All these results are important for policy makers.