PhD Thesis Title: The impact of ownership structure and the performance and risk exposure of European banks during the financial crisis
Supervisor: Associate Professor Thomas Conlon & Dr Cormac MacFhionnlaoich
External Examiners: Dr Thomas Flavin, NUI Maynooth
It is evident from previous studies that ownership structure is a vital facet of bank behaviour. There are two principal components of bank ownership that have an impact on a bank’s performance. Firstly, ownership type is considered. This typically classifies into commercial, mutual or government owned and is considered to have a significant impact on bank governance, risk exposure and profitability. Secondly, listing status is considered. Listing on a public exchange greatly increases the propensity of shareholders to impact the bank’s predisposition to generate excess returns, even at the expense of increasing risk at the institution.
Following Thomas Jefferson, who believed that banking establishments are more dangerous than standing armies, the 2008 financial crisis proved an extraordinary example of that insight. The crisis not only exposed the fragility of the financial system, but more importantly, the critical requirement for a less fragile system going forward. This study forms part of the literature that seeks to understand the performance of banks encompassing the 2008 financial crisis time period with a view to improving overall financial stability going forward. In particular, we build upon previous literature by demonstrating that mutual banks are the most stable bank type.
Although the deterioration in aggregate bank performance, during the most recent financial crisis, was the largest since the great depression, not all banks were impacted to the same extent. Combining performance data, risk data and ownership structure data generates a unique dataset. This has been used to examine the impact of different ownership structures on bank performance before, during and subsequent to the financial crisis.
For European banks, a number of conclusions are drawn. Firstly, government owned institutions performed the most poorly, both during the crisis, with poor returns and in its wake, with a loan book of inferior quality, compared to their peers. Secondly, the performance of listed institutions was worst during the crisis, but best in its aftermath. However, their performance was consistently superior to that of government owned institutions. Finally, those institutions that were best able to navigate the crisis and its aftermath were those with a mutual or private structure. Their lower risk focus allowed them to withstand the crisis and the flexibility of their structure allowed them to benefit from the recovery. Clearly such institutions are optimal for a financial system that requires long term stability, the challenge going forward is determining how they can be cultivated.