Impact Of Corporate Governance On Risk Taking And Performance At CCBs

Since their establishments, city commercial banks (CCBs) in China have achieved great success in improving risk management skills and increasing profitability due to continuous efforts of open-up and reform. Although we have made much progress, we can’t turn a blind eye to the severe problems yet to be solved. We can’t ignore the fact that the level of development varies greatly among different banks, both in asset scales and financial health condition. Quite a number of CCBs have no clear market positioning, no core competitive ability and lack the awareness of risk, and so on. Much of these problems are caused by unclear property rights and incomplete weak corporate governance mechanism. Further reforms in property rights and corporate governance are needed to keep a good record and make greater progress. This paper is aimed to examine the relationship among corporate governance, risk taking and performance of city commercial banks, which will help us understand better where the reform should head towards.The rest of the paper is organized as follows. Chapter1is introduction to the study background; chapter2reviews relative literatures about the relationship among bank governance, risk-taking behavior and performance; chapter3presents the theoretical foundation of the study and proposes the research hypotheses; chapter4is the empirical research of how internal corporate governance influences risk-taking behavior and performance in CCBs; chapter6is the conclusion and suggestion.Through theoretical and empirical study, we conclude that:(1) the more shares the first biggest shareholder holds, the poorer the performance seems to be and, meanwhile, the less risks the bank takes;(2) the stronger the control power the first biggest shareholder holds, the poorer performance the bank has but the risk taking level seems not to be lowered;(3) ownership concentration measured as the Herfindhal index of top five shareholders displays similar impacts of control power;(4) If local government is the first biggest shareholder of the city commercial bank, the bank tends to perform worse but the risk taking level seems to be unaffected;(5) foreign strategic investors impose negative effects on performance while show no significant impact on risk-taking behaviors of the bank;(6) the governance mechanism of board of directors is insignificant in posing an impact on bank risk taking and performance;(7) manager salary and manager ownership both have significant positive effects on bank performance but the former has significant positive effect on risk-taking level of the bank while the latter doesn’t display such evidence.Based on the empirical results, we propose four suggestions on improving corporate governance of CCBs as follows:(1) to optimize the ownership structure and decentralize control rights among top big shareholders;(2) to be more prudent and choose the partner carefully when introducing foreign strategic investors;(3) to select knowledgeable and diligent persons to join the board of directors and increase the proportion of independent directors;(4) to implement long-term managerial incentive plans such as RAROC and manager ownership.