Bank ownership and capital buffers: How internal control is affected by external governance

Using a sample of almost 300 European banks, we show that the concentration of ownership leads to larger capital buffers, consistent with theories of interest alignment and the charter value theory. Mixed empirical findings of previous literature suggest that external factors may affect the disciplinary role of controlling owners. In this paper, we demonstrate that the stabilizing impact of concentrated ownership is weaker when the level of regulatory discipline is higher. We also observe a weaker stabilizing impact when the level of market discipline is higher, while this effect seems to be less robust. Moreover, we find evidence for the too-big-to-fail phenomenon, since the stabilizing impact of ownership concentration on capital buffers is significantly weaker for systemically important institutions. Our findings indicate that bank owners are aware of the risk of losing charter value when external monitoring is lower and underline that internal governance of banks should not be discussed in isolation from external governance factors.