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Are private banks the better banks? An insight into the principal–agent structure and risk-taking behavior of German banks

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  • Frank Schmielewski
  • Thomas Wein
Abstract
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. Copyright © European Union 2015

Suggested Citation

  • Frank Schmielewski & Thomas Wein, 2015. "Are private banks the better banks? An insight into the principal–agent structure and risk-taking behavior of German banks," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 39(3), pages 518-540, July.
    • Handle: RePEc:spr:jecfin:v:39:y:2015:i:3:p:518-540
    DOI: 10.1007/s12197-013-9266-y
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    More about this item

    Keywords

    Financial crises; Risk-taking behavior; Risk aversion; Efficient portfolios; Information asymmetries and market efficiency; Government policy and regulation; Risk pooling; Seeking for high returns; Monitoring capabilities; Capital and ownership structure; Distance-to-default; Capital asset ratio; Return on assets; G01; G12; G14; G28; G15; G32;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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