We empirically investigate the impact of shareholders’ excess control rights (greater control than cash-flow rights) on bank profitability and risk and how the global financial crisis of 2007–2008 might have modified such an impact for a sample of European commercial banks. While the presence of excess control rights is associated with lower profitability, higher earnings volatility and higher default risk before the crisis (2002–2006) but also at the later stage of the financial crisis (2009–2010), conversely, it improves profitability, lowers earnings volatility and no longer affects default risk during the 2007–2008 financial crisis years. Further evidence shows that, regardless of the period, the effect of excess control rights on profitability and risk is accentuated in family-controlled banks and in countries with relatively weak shareholder protection rights and that such an effect is mainly effective at intermediate and high levels of excess control rights. Overall, our findings contribute to the literature examining the corporate governance determinants of banks’ performance during the 2007–2008 global financial crisis and have several policy implications.

This paper explores how banks’ environmental, social, and governance (ESG) activities affect their lending during financial crises. We use a sample of European listed banks with available ESG scores from 2002 to 2020 and consider the global financial crisis of 2007–2009 and the European sovereign debt crisis of 2010–2012. We estimate a two-step system GMM dynamic panel data model and also address potential endogeneity with instrumental variable (IV) and difference-in-difference (DiD) estimations. We find that lending falls to a lesser extent for banks with higher ESG scores during crisis times. Our findings are robust to using alternative ESG rating providers. An investigation of the different potential channels shows that, during crises, banks more engaged in ESG activities are less affected in terms of credit risk, asset risk, and profitability. They also face a lower reduction in market funding, allowing them to downsize to a lesser extent during crises, and their deposit rates do not increase as much as in less ESG-engaged banks. A deeper investigation reveals that our findings mainly hold for banks focused on traditional lending and deposit activities and are essentially driven by the environmental pillar component of ESG scores and the global financial crisis of 2007–2009.

Using a sample of banks operating in 24 countries, we provide robust evidence that stronger creditor rights are associated with higher capital adequacy ratios for conventional banks but not for Islamic banks. Such results suggest that, under stronger creditor protection, only the managers of conventional banks increase equity, presumably as a means of signalling better monitoring efforts and of avoiding loss of control. A possible reason for the finding that Islamic banks do not generally increase equity is that, under the profit loss sharing (PLS) principle, depositors share profits and losses with the bank. The role of creditor protection is hence irrelevant in an Islamic banking context. However, we show that in predominantly non-Muslim countries with less competitive markets, Islamic banks show a similar association between creditor rights and capital ratios as conventional banks.

We study the liquidity behavior of commercial banks in response to negative capital shocks. Using pre-Basel III data, U.S. banks with assets less than $1 billion treated (unregulated) liquidity and (regulated) capital as substitutes. Following exogenous shocks to their regulatory capital ratios, these banks shifted away from loans, loan commitments, and dividend payouts, actions that both repaired their capital ratios and enhanced their liquidity positions. We find little similar behavior at larger banks. We conclude that a minimum capital constraint naturally mitigates liquidity risk at community banks, justifying the exemption of these banks from the Basel III liquidity standards.

This paper investigates the impact of banks’ political connections on their ability to collect deposits under two different deposit insurance regimes (blanket guarantee and limited guarantee). We use a unique hand-collected dataset that identifies the political connections of Indonesian commercial banks, from Q1:2002 to Q2:2008. We find that, regardless of their type (state-owned or private entities), politically connected banks are able to attract deposits more easily than their non-connected counterparts. We also show that this effect is more pronounced after the implementation of formal deposit insurance with limited coverage. Our findings have various policy implications. Formal deposit insurance might have improved market discipline, as highlighted by earlier studies, but it has also exacerbated the issue of political connections in the banking sector.

We investigate whether excess control rights of ultimate owners in pyramids affect banks׳ capital ratio adjustments. When control and cash flow rights are identical, to boost capital ratios banks issue equity without cutting lending. However, when control rights exceed cash flow rights, instead of issuing equity, banks downsize by reducing lending. Such a finding is mostly prevalent in countries with weak shareholder protection or for family-controlled banks. Other factors also explain the extent to which such banks reduce lending. Our findings contribute to the capital structure adjustment literature and have critical policy implications for the implementation of Basel III and the debate on capital requirements and bank lending.

We empirically investigate how bank internationalization, organizational complexity, and geographical complexity stemming from foreign-affiliate type and geographic dispersion affect parent bank stability and profitability. We base our analysis on unique, hand-collected data for the worldwide locations of subsidiaries and branches of EU banks. Our results show that internationalization benefits bank stability by reducing default risk, and it is significantly associated with lower earnings volatility but poorer profitability. With regard to foreign organizational complexity, banks with both foreign subsidiaries and foreign branches are more stable than banks with foreign branches exclusively, which are more stable than banks with only foreign subsidiaries. Nevertheless, higher geographic complexity is associated with lower default risk, higher volatility in earnings, and higher profitability. Further investigations on the sovereign debt crisis and bank size indicate that the sovereign debt crisis in 2011 amplified the relationship and our findings mainly hold for small banks.

Our study of 602 European banks over 1996–2002 investigates how the banks’ expansion into fee-based services has affected their interest margins and loan pricing. We find that higher income share from commissions and fees is associated with lower margins and loan spreads. The higher the commission and fee income share, moreover, the weaker the link between bank loan spreads and loan risk. The latter result is consistent with the conjecture that banks price (or misprice) loans to increase sales of other services. That loss leader (or cross selling) hypothesis has implications for bank regulation and competition with (non-bank) lenders.