TY - JOUR

T1 - Are private banks the better banks?

T2 - An insight into the principal-agent structure and risk-taking behavior of German banks

AU - Schmielewski, Frank

AU - Wein, Thomas

N1 - Publisher Copyright: © 2013, © European Union.

PY - 2015/7/8

Y1 - 2015/7/8

N2 - In this study, we hypothesize that the distinguishable principal-agent relationships of German banks significantly influence the risk-taking attitudes of bank managers. In particular, we substantiate the theory that banks owned by dispersed shareholders, or federal state authorities, face a higher relevance of principal-agent problems than other banking sectors due to the lack of monitoring bank managers. Our results show that lack of accountability allows bank managers the liberty to participate in risk-taking behavior. First we present, from the bank owners' viewpoint, a theoretical model to explain three factors of principal-agent relationships used to determine the highest probability of choosing an optimal portfolio of risky assets. The three factors are: the ability to control bank managers, the risk pooling capabilities of bank owners and bank managers, and the incentive of seeking high returns. To support our hypothesis, we apply an empirical study to the distance-to-default of different German banking sectors. This demonstrates that the risk-taking attitudes of banks are closely related to banks' ownership structures. Consequent to our findings, we suggest legislative and regulatory authorities increase vigilance in terms of principal-agent problems within certain sectors of the banking industry.

AB - In this study, we hypothesize that the distinguishable principal-agent relationships of German banks significantly influence the risk-taking attitudes of bank managers. In particular, we substantiate the theory that banks owned by dispersed shareholders, or federal state authorities, face a higher relevance of principal-agent problems than other banking sectors due to the lack of monitoring bank managers. Our results show that lack of accountability allows bank managers the liberty to participate in risk-taking behavior. First we present, from the bank owners' viewpoint, a theoretical model to explain three factors of principal-agent relationships used to determine the highest probability of choosing an optimal portfolio of risky assets. The three factors are: the ability to control bank managers, the risk pooling capabilities of bank owners and bank managers, and the incentive of seeking high returns. To support our hypothesis, we apply an empirical study to the distance-to-default of different German banking sectors. This demonstrates that the risk-taking attitudes of banks are closely related to banks' ownership structures. Consequent to our findings, we suggest legislative and regulatory authorities increase vigilance in terms of principal-agent problems within certain sectors of the banking industry.

KW - Management studies

KW - financial crises

KW - risk-taking behavior

KW - risk aversion

KW - efficient portfolios

KW - information asymmetries market efficiency

KW - Gorverment policy and regulation

KW - risk pooling

KW - seeking for high returns

KW - monitoring capacibilities

KW - capital and ownership structure

KW - distance-to-default

KW - capital asset ratio

KW - return on assets

KW - Politics

UR - http://www.scopus.com/inward/record.url?scp=84930482728&partnerID=8YFLogxK

U2 - 10.1007/s12197-013-9266-y

DO - 10.1007/s12197-013-9266-y

M3 - Journal articles

VL - 39

SP - 518

EP - 540

JO - Journal of Economics and Finance

JF - Journal of Economics and Finance

SN - 1055-0925

IS - 3

ER -