An Empirical Analysis on Board Monitoring Role and Loan Portfolio Quality Measurement in Banks

Stefanelli, Valeria and Matteo, Cotugno (2010): An Empirical Analysis on Board Monitoring Role and Loan Portfolio Quality Measurement in Banks. Forthcoming in: Academy Journal of Banking Studies

Abstract

This paper aims to analyze the effectiveness of the board monitoring role on specific loan portfolio quality measures in banks (default rate, recovery rate and provisioning rate). We use a sample comprises a totality of Italian-based banks, listed at Borsa Italiana SpA in 2006-2008 and a number of accounting proxies to express the loan portfolio quality of a bank. The results of the analysis show an overall weakness of the board role (expressed by Independents and Audit Committee on board) in monitoring loan portfolio quality of the bank, with the subsequent damage of the interests of stakeholders. A positive contribution of board monitoring, even if partial, is highlighted in two cases: Independents seems improve recovery rate, while the Audit committee enhances provisioning rate in banks. With reference to default rate, a total negative effect of board monitoring is reported. On the base of these results, some managerial implications are proposed.

• Item Type: MPRA Paper
• Language: English
• Keywords: Banks, Corporate governance, Board of directors, Loan Portfolio Quality
• Subjects: G - Financial Economics > G3 - Corporate Finance and Governance > G34 - Mergers ; Acquisitions ; Restructuring ; Corporate Governance; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

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