Risk governance and risk taking behavior of banks in emerging markets

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Abstract

The study examines how risk governance mechanisms affect the risk activities of banks in emerging markets, Africa in particular. The sample comprised of forty-one banks in twelve African economies. Consistent with Akbar, Kharabsheh, Poletti-Hughes, and Shah (2017), Battaglia and Gallo (2017), and Sila, Gonzalez, and Hagendorff (2016), system GMM which controls for reverse causality and endogeneity was used for analysis. Surprisingly, the study found that the presence of a standalone risk committee, training in risk management and/or related courses, and the appointment of the chief risk officer (CRO) to the board increases instead of decreasing bank risk. Qualifications and experience in risk management or finance and the establishment of a CRO position were found to have an insignificant impact on risk outcomes. Intuitively, the study found that the appointment of females on bank boards results in risk-averse decisions and thus supports current calls for female representation on boards. A key takeaway from this paper is that establishing effective risk governance systems in emerging markets creates incentives for banks to take more risk, possibly, due to the fact that governance mechanisms that align the interests of managers and shareholders lead to higher bank risk (Felício, Rodrigues, Grove, & Greiner, 2018). This counterintuitive behavior calls for the design of appropriate governance and regulatory mechanisms that curtail bank risk in the African context.

Keywords: Risk Governance, Risk-Taking Behavior, Banks, Africa, System GMM

Authors’ individual contribution: Conceptualization — T.M.; Methodology — T.M.; Software — T.M.; Validation — S.G.; Formal Analysis — T.M.; Investigation — T.M. and S.G.; Resources — S.G.; Data Curation — T.M.; Writing — Original Draft — T.M.; Writing — Review & Editing — S.G.; Visualization — S.G.; Supervision — S.G.; Project Administration — T.M.; Funding Acquisition — S.G.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: G1, G21, G30, G32, M14

Received: 22.09.2021
Accepted: 25.03.2022
Published online: 28.03.2022

How to cite this paper: Mashamba, T., & Gani, S. (2022). Risk governance and risk taking behavior of banks in emerging markets. Journal of Governance & Regulation, 11(2), 15–31. https://doi.org/10.22495/jgrv11i2art2