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Do economic freedom and board structure matter for bank stability and bank performance?

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  • Mavrakana, Christina
  • Psillaki, Maria

Abstract

This paper investigates the effects of economic freedom, regulations and bank governance on bank performance and risk-taking in 18 European countries for the period 2004–2016. To this end, we use the Fraser economic freedom index and its sub-components namely credit, labor and business market regulation. Our results reveal that economic freedom increases bank performance and contributes to financial stability and soundness. Moreover, we show that liberal credit, labor and business regulation improves the profitability of banks and reduces risk-taking. Regarding the bank governance variables, we find that a large board increases the probability of default whilst the results are mixed for bank performance. Also, we show that experienced directors are associated with less risk-taking and better bank performance. The impact of female directors is positive on bank performance. Regarding the risk-taking of banks, we find that, in a liberal environment, women lead to less credit risk. Finally, the compensation of directors increases bank performance and reduces risk-taking. Our findings change depending on the time period and the location.

Suggested Citation

  • Mavrakana, Christina & Psillaki, Maria, 2019. "Do economic freedom and board structure matter for bank stability and bank performance?," MPRA Paper 95709, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:95709
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    2. Nesrine Djebali, 2024. "Assessing the determinants of banking stability in the MENA region: what role for economic and financial freedom?," Journal of Banking Regulation, Palgrave Macmillan, vol. 25(2), pages 127-144, June.
    3. Muhammad Hussain & Farzan Yahya & Muhammad Waqas, 2021. "Does strong governance stimulate the effect of economic freedom and financial literacy on financial inclusion? a cross-country evidence," Future Business Journal, Springer, vol. 7(1), pages 1-10, December.
    4. Kaodui Li & Yusheng Kong & Sampson Agyapong Atuahene & Geoffrey Bentum-Micah & Michael Kwakye Agyapong, 2020. "Corporate Governance and Banking Stability: The Case of Universal Banks in Ghana," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(Special 1), pages 325-352.

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    More about this item

    Keywords

    Fraser economic freedom index; bank stability; regulation; bank governance; bank performance;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • P34 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - Finance
    • P51 - Political Economy and Comparative Economic Systems - - Comparative Economic Systems - - - Comparative Analysis of Economic Systems

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