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.

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.