The Mutual Impacts of Corporate Governance Dimensions and Legal Protection Systems on the Performance of European Banks: A Post-Crisis Study

By El-Chaarani, Hani | European Research Studies, April 2017 | Go to article overview

The Mutual Impacts of Corporate Governance Dimensions and Legal Protection Systems on the Performance of European Banks: A Post-Crisis Study


El-Chaarani, Hani, European Research Studies


1. Introduction

The waves of the financial crisis and corporate governance scandals within the last decade have established the answering waves of re-adjustments and re-regulations of the banking sector in Europe. At the beginning, the economists and financial analysts ascribed the financial crisis of 2008 to the credit conditions and housing policy. The governance policies of the banking sector were not understood to be the origin. The reviewing of the crisis in Europe and US took the view that governance practices were the major cause that allowed the crisis to develop worldwide. Some financial specialists (Sir Christopher Hogg, 2009; Kirkpatrick, 2009; Lloyd, 2009; Peni and Vahamaa, 2012; Allegret et al., 2016; Thalassinos et al., 2015; Suryanto, 2016), and international reports (US Financial crisis inquiry commission, 2010; International financial corporation and European bank, 2012) argue that the governance was a major cause of the banking sector allowing a bad situation to get worse. Even the financial service Authority asserted in 2009 that the poor corporate governance practices had contributed to the latest financial crisis.

The newest report of the Basel Committee (July, 2015) overhauled the report of Basel II through 14 principles concerning bank structure, disclosure, transparency, compensation, internal control, risk management, senior management and board structure. The OCED reports, the green papers of the European commission, the walker review, the European Central Bank reports and many other law reforms and reports were spread over the European Union member states to support the central role of the banking sector. Even at the worldwide level, the IMF (International monetary funds) and the World Bank have developed a set of corporate governance recommendations urging all countries to use them.

However, legal origin and the protection level are as important as the actual legal adjustments. Beck et al. (2003a and 2003b) reveal that legal origin matters in financial development because legal traditions differ in their ability to adapt. Bebchuk and Roe's (1999), La Porta et al. (1998, 1999, 2000), and Claessens et al. (2000) shed light on the legal origin as the main element explaining the ownership structure and performance differences across countries. Stiglitz (1985), Shleifer and Vishny (1997), Claessens et al. (2000), Giannarakis (2016) and many other authors have examined the impact of alternative legal origins regarding investor rights on firm valuation. For the authors a strong legal protection limits the expropriation of minority shareholders and promotes performance while a weak legal protection can lead the blockholders and the inside owners to abuse their positions.

The European banking authority (EBA) stated in 2011 that the banking financial crisis and internal corporate governance weaknesses are caused by insufficient implementation of existing guidelines, especially in European countries characterized by a low level of protection and regulations. This is why our focus on legal protection and origin becomes crucial for studying the performance and the governance structure of European banks.

In Europe, protection levels vary a lot across countries due to differences in legal origins. Nowadays, five legal origins and three legal protection levels exist in Europe. The first one is the French civil law countries, characterized by the lowest level of legal protection (La Porta et al., 1998) and identified after the French revolution in the 19th century before being developed with the French colonial era in many nations such as Spain and Belgium.

The second legal origin is the Ex-Socialist law countries. It is emerged as a part of Europe after the dissolution of the Former Soviet Union in December 1991. This legal origin exists in many European countries such as Lithuania and Estonia and it is characterized by low level of legal protection (Caprio et al. …

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