A Study On Creditors' Governance Of Commercial Banks

Commercial banks, with extensive externalities, play a vital role in the financial system and the whole economy. The Asian financial crisis in the 1990s made people realized the internal relationship between the fragility of financial sector and the corporate governance of commercial banks. Since then, the research on corporate governance of banks surged up around the whole world. However, the importance of banks is not the only reason to study these issues. The substantially special nature of commercial banks challenges the general theories of corporate governance and makes it particular and more complex. It is necessary to carry out comprehensive studies in order to combine the special features of banks with general governance theory and to build a general framework for bank's corporate governance.Recently in China, establishing a modern enterprise system and improving the corporate governance structure have become the core of the reform of banking industry. Therefore, enhancing researches on commercial bank's corporate governance has extraordinarily theoretical and practical significance.This paper focuses on the creditors'right of commercial banks and conducts in-depth analysis about these issues when studying their corporate governance. Industrial characteristics increase the risk-taking behaviors of bank's shareholders. Particularly, in case that a bank-run or even bankruptcy occurs, the creditors rather than the shareholders will suffer greater losses. Bank's shareholders, with strong risk preferences, and bank's operators tend to conspire and harm the interests of creditors. Thus, banks should put particular emphasis on protecting the interests of creditors, especially depositors; meanwhile, creditors themselves should be more effectively involved in supervising and regulating banks'behavior to ensure their own interests. Doing comprehensive research on creditors' governance of commercial banks can further help to improve banks'corporate governance as a whole. There are three main parts in this paper. The first part, chapter 2, is the literature review. The second part is the main body of this paper, including the study on special features of commercial banks and the change in its creditors' governance derived from those characteristics in chapter 3, the study on the governance effects of depositors in chapter 4 and in chapter 5, the study on the governance of uninsured large creditors. The third part draws a conclusion based on the analysis above; some measures aiming at promoting the creditors' governance in commercial banks are concluded.Chapter 1 is an introduction. The background and significance of the study are presented. Then, the logic, the structure, the research methods and the innovations are outlinedChapter 2 is the literature review. The literature in the field of creditors' governance can be categorized into three parts:the function of debt, the agent cost of debt and the governance mechanisms of debt. As for the corporate governance of commercial banks, it focuses on the special features, the resulting special governance objectives and mechanisms. Then, brief comments are made on the existing literature, pointing out that there is still a lack of systematic analytical framework about the creditors'governance of banks.In Chapter 3, a general analytic framework for the creditors'governance of commercial banks is set up, given the significant special features of commercial banks. Commercial banks make themselves different in the following aspects:the special products and contracts, the special nature of capital and capital structure, the opaqueness causing more severe information asymmetry problems, extensive externalities, safety nets and external regulations. These characteristics lead to obvious changes of the mechanisms of creditors'governance. High leverage makes the bank's shareholders typical risk-takers. To protect the interests of creditors and strengthen protection mechanisms on behalf of creditors becomes an important objective for corporate governance of banks. However, small depositors cannot effectively supervise and monitor commercial banks, while the uninsured large creditors play their governance roles mainly through the indirect market discipline mechanism. In addition, the opaqueness causes internal control problem more serious and makes it more difficult for creditors to monitor insiders. Further, safety nets lead to more serious moral hazard; external supervision may substitute the bankruptcy mechanism, the negative debt covenants and the market discipline mechanisms.Chapter 4 studies the governance effects of depositors. Depositors, the main source of bank funds, are the key to governance. Unfortunately, they cannot participate in the process of governance voluntarily. On the one hand, small depositors lack capacity and incentives to intervene bank's management, making their governance invalid. On the other hand, only large-scale corporate depositors have relatively strong incentives to do so. Supervision representatives, early-warning mechanism and bankruptcy can ease these dilemmas to some extent.Chapter 5 is about the governance of uninsured large creditors. Subordinated debts play a special role in strengthening market discipline. Interbank creditors and financial bond holders conduct their governance role through reputation mechanism and interbank competition mechanism. Due to the extensive external supervision, governance mechanisms of large creditors are directly affected by the behaviors of regulators and the substitution effect exists to a certain degree.In Chapter 6, based on all the analyses above about the special creditors' governance mechanisms and dilemmas, some measures and instructions aiming at promoting the level of creditors'governance in commercial banks are concluded. The fundamental and prior way is to establish a better internal governance structure, requiring a diversified property rights structure, a sound internal supervisory mechanism and a suitable executive compensation arrangement, etc. Meanwhile, the external governance structure and mechanisms have to be improved,including the conduct of prudential and effective supervision and regulation, the enhancement of market discipline role played by creditors, the improvement of information disclosure standards, and so on.The innovations of this paper are as follows. From the perspective of creditors'rights, this paper conducts a comprehensive study on the mechanisms and effects of creditors'governance concerning the special features of commercial banks. Small depositors of commercial banks can be divided into individuals and corporate depositors, while uninsured large creditors include subordinated debt holders, interbank creditors and financial bonds holders, etc. This paper analyzes the governance mechanisms and effects of each kind of these creditors, respectively. The characteristics of large amount of individual depositors weaken the governance effects. Corporate depositors of different sizes and types have different level of incentives and distinct effects. Interbank creditors and financial bonds holders conduct their governance role through reputation mechanism and interbank competition. External supervision substitutes the bankruptcy, debt negative covenants and market discipline to some degree.