Academic journal article IUP Journal of Corporate Governance

Impact of Internal Mechanisms of Governance on the Tunisian Banks' Risk-Taking

Academic journal article IUP Journal of Corporate Governance

Impact of Internal Mechanisms of Governance on the Tunisian Banks' Risk-Taking

Article excerpt

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Introduction

Since the beginning of deregulation and liberalization processes in the mid 1980s, the Tunisian banking sector has become more market-oriented, more attractive for foreign investors and more competitive. All these changes would certainly have implications on the risk taken by the Tunisian banking industry. This research enrolls in the setting of literature, identifying the determinants of bank risk-taking. The paper aims to present an important internal determinant of bank risk taking that is 'Corporate Governance'. The paper particularly aims to analyze the incidence of internal mechanisms of governance on the risk-taken by the Tunisian commercial banks over the period 1995-2007.

This research is motivated by three factors: (1) The environment in which Tunisian banks operate is more competitive, more deregulated and not immunized against diffusion of new technologies of information and communication. Consequently, this new environment has not only offered new opportunities of investment to Tunisian banks, but also exposed them to a wider range of risks. So, it is necessary to set up a governance system permitting to control and manage these different risks; (2) the increasing size of the Tunisian banking sector and its opaqueness have led to an increased potential of moral hazard problems between shareholders and managers of these banks; and (3) the gap noticed in the literature on Tunisian bank governance, especially in relation with the bank risk-taking.

The paper first presents literature review and methodology. It then provides empirical results of the relation between internal mechanisms of governance and bank risk-taking in the Tunisian banking sector, before concluding.

Literature Review

The analysis of the relationship between internal mechanisms of governance and bank risk-taking has received a special interest in literature.

A large part of this literature has focused on the relation between ownership structure and bank risk-taking. Many researches have examined the relation between insider ownership and bank risk-taking. Saunders et al. (1990) and Knopf and Teall (1996) have found that this relationship is positive and linear. Demsetz et al. (1997) and Chen et al. (1998) have found that this relationship is nonlinear. Gorton and Rosen (1995) and Dolde and Knopf (2006) have found an inverted U-Shaped relationship between insider ownership and bank risk. A second set of research work has focused on the relation between ownership concentration and the level of bank risks, and a third set of research work has focused on the relation between public ownership and bank risk-taking. Micco and Panizza (2004) have found that public banks are riskier than other banks since they play an important role in the facilitation of the credit policies and their loans are less sensitive to macroeconomic shocks in comparison to private banks. Sapienza (2004) has found that public ownership in banks is associated with high level of risk since banks prefer to finance businesses in crisis-stricken regions, or where the economic sectors have difficulties. Giuliano et al. (2007) have found that public banks have a weak quality of loan and a higher level of insolvency risk compared to other types of banks. Other researches have analyzed the link between foreign-owned banks and their levels of risks. Majnoni et al. (2003) have found that foreign-owned banks have politics of risk that is not different from the domestic private banks. Berger et al. (2005) have found that foreignowned banks are desirable in the banking industry in order to constitute an efficient banking sector and reduce risk. Bonin et al. (2005) have shown that foreign-owned banks are more efficient and less riskier than other banks. Megginson (2005) found that foreign owned banks can reduce the level of bank risk because they adopted more prudent strategies for reputation reasons. …

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