Bank Shareholder Governance and Systemic Vulnerability
ZHOU Yinggang, PAN Jun, LIU Yan
Center for Macroeconomic Research, School of Economics, The Wang Yanan Institute for Studies in Economics, Paula and Gregory Chow Institute for Studies in Economics, Xiamen University; Business School, Sun Yat-sen University
Summary:
The Resolution of the Central Committee adopted at the third plenary session of the 20th Central Committee of the CPC pointed out that improving the institutional governance of commercial banks is an important connotation of deepening the reform of the financial system and preventing and defusing financial risks. In November 2023, the Financial Stability Bureau of the People's Bank of China pointed out that banking stability underpins financial system stability. Early identification and proper treatment of risks in small and medium-sized banks are crucial to prevent systemic risks. Recent risk events involving commercial banks have drawn significant attention and substantially impacted financial markets. Currently, high-risk small and medium-sized banks are major risk sources for the entire banking industry and even the financial industry, with their risks rooted primarily in deficient corporate governance. Although Baoshang Bank lacks traditional “systemically important bank” characteristics, its internal governance flaws and extensive interbank linkages rendered it a “systemically vulnerable bank”. Notably, Chinese commercial banks share consistent corporate governance mechanisms, with shareholder governance being central across all banks, which is a key distinction from the board-governance focus in developed economies. This study examines the frequent risk occurrences in commercial banks through the perspective of bank shareholder governance, analyzing how equity structure characteristics influence systemic vulnerability. The findings offer practical insights for enhancing bank corporate governance and mitigating systemic risks in the banking industry. First, we utilize the Chinese Banking Database (CBD) to construct interbank asset-liability networks and compute bank-level default probabilities under external shocks to measure systemic vulnerability. This methodology enables accurate identification of systemically vulnerable banks, including non-listed institutions that are often overlooked in conventional analyses. Our empirical analysis reveals several key findings regarding the influence of equity structure characteristics on systemic risk. State ownership and the increase of the degree of equity balance are found to significantly reduce bank vulnerability, with this effect being particularly pronounced among city and rural commercial banks. We also identify a distinct U-shaped relationship between ownership concentration and vulnerability, demonstrating that both excessive concentration and excessive dispersion of ownership weaken governance effectiveness. Furthermore, our analysis of bank-shareholder networks shows that greater network centrality negatively affects vulnerability, suggesting that well-connected shareholders contribute to financial stability. These empirical results remain robust after considering endogeneity issues. Additional mechanism analysis reveals that sound shareholder governance mitigates systemic risk through three primary channels: lower financial leverage, reducing active risk taking, and limiting interbank risk exposure. This paper makes three key contributions. First, it addresses a critical research gap by examining the relationship between bank shareholder governance characteristics and systemic vulnerability, which is a crucial yet understudied determinant of bank risk events. We innovate methodologically by constructing a bank-level systemic vulnerability indicator, thereby expanding the research scope of bank systemic risk from a corporate governance perspective. In light of the recent risk events affecting small and medium-sized banks in China, our research on identifying systemically vulnerable banks and analyzing the underlying shareholder governance factors is of great significance, providing both theoretical insights and practical implications. Second, the study provides a comprehensive, multidimensional analysis of how shareholder governance characteristics influence vulnerability of banks, yielding new micro-level evidence on the governance-systemic risk nexus in commercial banks. Third, our research advances beyond existing studies through more diverse equity feature indicators and more representative bank samples, with empirical results demonstrating greater reliability through standardized large-sample analysis. Collectively, this study systematically examines the equity characteristics of commercial banks in China, making significant contributions to the emerging literature on bank governance and systemic risk.
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