Risk Taking and Corporate Governance in the New Bank Regulatory Requirements

The financial crisis (2008) and the sovereign debt crisis (2011) have revealed that excessive risk-taking and unethical corporate cultures constitute risks for the global financial system. Apparently, globally significant financial institutions need to change some of their fundamental ethical norms and behaviours. Large information asymmetries, opaqueness and complexities characterize the banking sector. Hence, to establish an effective corporate governance is a crucial determinant of success or failure as well as for maintaining financial stability. New macroprudential capital requirements have been phased-in, in successive steps across the 28 European Union (EU) countries starting in 2014. The Capital Requirements Regulation (CRR) and the Capital Requirements Directive (CRD IV) have introduced a new macroprudential framework transposing the Basel III agreement in the EU. Stricter rules on capital adequacy, as well as new corporate governance and remuneration rules were enclosed. Banks should be encouraged to take acceptable levels of risks while minimizing the likelihood of bankruptcy. The principal-agent theory shows that the presence of imperfect information may be represented as moral hazard caused by the existence of distorted incentives between the principal and the agent. There is also a possibility that regulated banks develop risk-taking incentives due to high capital requirements impact to profit. An effective process to identify and manage behaviour must be developed to avoid negative incentives. Besides the rational calculation there is a variety of information and mental processes as emotions, moral and professional rules of conduct or social norms to make financial decisions which should be taken into account. This article gives a brief overview over the effect of corporate governance for European banks which are much less analyzed as US banks, identifies key limitations and discusses the option for the guidance from organizational psychology, decision-making and management studies.