Commercial Bank Corporate Governance Mechanism

In the standard corporate governance theory, commercial banks are primarily viewed as a force monitoring firms. However, the premise for banks to play a positive role in corporate governance of firms is that the banks themselves are subject to effective corporate governance mechanism. The lessons from the East Asian financial crisis prompt people to reflect on the issues of corporate governance of both the non-financial firms as well as the banks. Thus, the corporate governance of banks has begun to attract attention of the researchers.This paper uses standard theories of corporate governance to highlight the special problems facing corporate governance of financial intermediaries and combines this theoretical perspective with international observations to make policy recommendations. Standard agency theory defines the corporate governance problem in terms how equity and debt holders influence managers to act in the best interests of the providers of capital. As non-financial corporations, commercial banks face standard corporate governance problems. However, as financial intermediaries, banks have some special attributes different from the standard corporation, which intensify standard corporate governance problems. Moreover, pervasive government involvement raises new impediments to effective corporate control. The severe opaqueness of banks hinders traditional corporate governance mechanisms. This opaqueness makes it more difficult for equity and debt holders to exert corporate governance of banks and it can weaken competitive forces in the product market and the market for corporate control. Besides, the external governance mechanism of regulation and supervision is hindered because of the opacity of banks. On the other hand, government involvement in the banking sector exacerbates corporate governance problems in banks. Deposit insurance and implicit or explicit government guarantees on bank liabilities virtually eliminate any efforts by debtors to monitor...