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The Influence of Corporate Governance on Credit
Ratings for European Banks
Y.H. ERNST
Master Thesis for MSc. Finance Program of the University of Groningen
Supervisor: Dr. L. Dam June 21, 2013
ABSTRACT
This thesis focuses on the influence of corporate governance on the credit ratings of European Banks during the period 2005 to 2010. The findings show that while a higher level of corporate governance is related to higher credit ratings for banks, not all aspects of the corporate governance structure are of significant influence. Improving the function and the structure of the board are key facets in realizing a higher credit rating. Moreover, the increased attention on risk taking and compensation policies since the start of the financial crisis in 2008 did not lead to an amplifying effect on the relationship between corporate governance and banks’ credit ratings.
Keywords: Agency theory, corporate governance, credit rating, financial crisis, managerial power approach, risk, panel data analysis
JEL classification: C33, C38, G01, G21, G24, G34
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I. Introduction
Banks’ credit ratings have attained increasingly widespread attention since the recent financial crisis. Credit rating agencies (CRAs) failed to rate the risk of financial securities correctly, and moreover the default risk of banks. Ashby (2011) states: “The banking crisis was predominantly caused by weaknesses in the management and regulation of banks. These weaknesses lead to problems such as flawed compensation schemes, poor risk management communication and an over-reliance on mathematical risk models.” So he recommends the improvement of disclosure rules and the enhancement of risk management guidance and that supervisory tools have to be of greater importance. This study therefore examines if a positive relationship exists between the level of corporate governance and the credit ratings of banks and if improvements or deteriorations are incorporated in these credit ratings. Moreover, the amplifying effect of the financial crisis on the need to improve the corporate governance structure of banks will be investigated. Due to the financial turmoil started in 2008 and the accompanying increased attention on corporate governance, there has been an increasing politicisation of governance and control mechanisms (Horn, 2012). Therefore, the relationship between corporate governance and credit ratings could be enhanced in more recent years.
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The effect of corporate governance on the credit ratings of banks is investigated by using the credit ratings given by Fitch and scores on corporate governance features obtained from Datastream. Besides an overall corporate governance score, the specific effects of four dimensions of corporate governance on credit ratings are examined. These dimensions are board structure, board function, compensation policy, and shareholder rights. Additionally, several bank-specific explanatory variables (e.g. return on assets, size, and leverage) are included in the regressions because prior literature showed that they are determinants of credit ratings.1
In prior research the relationship between corporate governance and credit ratings is investigated multiple times, mostly for U.S. firms. Ashbaugh-Skaife et al. (2006) investigated the relationship between corporate governance structure and credit ratings of firms. They showed that companies which have desirable governance attributes are more likely to attain an investment-grade credit rating. Alali et al. (2012) show a similar relationship for U.S. firms by using corporate governance indices as proxies for corporate governance.
Moreover, the research of Aebi, Sabato, and Schmid (2012) focused particularly on the influence of corporate governance characteristics on the performance of banks during the financial crisis. Their results show that the performance of banks is significantly better if the chief risk officer (CRO) reports directly to the board of directors, instead of to the chief executive officer (CEO). This is possibly due to conflicting interests between the CRO and CEO. Nevertheless, the results underline the importance of risk governance and the reporting line of the CRO. However, they find no relationship between other governance characteristics (for example CEO ownership and shareholder rights) and the bank’s performance during the financial crisis. Also Fahlenbrach and Stulz (2011) found no evidence that banks performed worse during the crisis when having CEOs employed whose incentives were less well aligned with the interests of their shareholders. Aebi, Sabato, and Schmid (2012) conclude: “Our results show that standard governance measures as used in a large body of literature on corporate governance and its valuation effect in non-financial firms may fall short in describing the relevant governance structure of banks, in particular with respect to their crisis performance. Our results highlight the importance of the so-called ‘risk governance’ in banks.”
Additionally, Peni and Vähämaa (2012) found mixed results with respect to the relationship between corporate governance and the performance of U.S. banks during the financial crisis.
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They show that stronger corporate governance mechanisms have a positive moderating effect on the negative relationship between the financial crisis and the financial performance of a bank, especially before the actual crisis and in the direct aftermath of the market turmoil. However, their results also show that good governance may have had negative effects on stock market valuations of banks during the crisis, indicated by lower Tobin’s Q and stock returns for banks with strong corporate governance mechanisms.
The research above shows that while corporate governance is a predictor of financial performance, the relationship for banks during the financial crisis is not identified unambiguously. It highlights also the difference between the corporate governance of banks and firms, which is amplified by Becht et al. (2011). Risk management proofs to be an important feature of the governance of banks. This factor plays an important role in the determination of credit ratings by CRAs. Among others, Alali et al. (2012) showed that credit ratings are influenced by corporate governance. However, the effect of risk management, and more generally corporate governance, on credit ratings is not investigated for banks during the financial crisis.
I find that the level of corporate governance of European banks influences their credit ratings positively and that improvements in the level of corporate governance can lead to a higher investment grade. The structure and functions of the board are dimensions of corporate governance that are of particular influence on banks’ credit ratings, whereas compensation policy and shareholder rights do not have a significant effect. While the financial crisis is correlated positively with the overall corporate governance score of banks, the interaction effect between these two variables does not have a significant influence on banks’ credit ratings.
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II. Literature Review
A majority of current research on the impact of corporate governance on credit ratings is founded on the agency theory. Ashbaugh-Skaife et al. (2006) state that there are two agency conflicts for firms that can increase the probability of default. First, a conflict between management and all external stakeholders (bond- and shareholders) can arise. Information asymmetry problems occur due to separation of ownership and control between management and external stakeholders. This can create moral hazard problems for managers, which can increase agency risk and decrease the expected value of the cash flows. Which in turn leads to lower credit ratings. The second agency conflict Ashbaugh-Skaife et al. (2006) mention is between shareholders and bondholders. In highly levered firms shareholders have the incentive to transfer wealth from bondholders to themselves. By this the mean and the variance of the firm’s future cash flows are affected. Shareholders can do this by influencing managers to invest in riskier projects; through this the mean and the variance of the firm’s future cash flows are increased. However, the increase of the direct risk of this action is affecting bondholders more heavily. The actions taken by shareholders can lower the credit ratings of firms.
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Thus, by means of improving the corporate governance structure, banks attempt to improve the incentives of managers and thereby take on the agency problems described above. Minguez-Vera and Martin-Ugedo (2010) describe the risk taking behaviour of managers from the point of view they call the ‘power perspective’ and which differentiates from the agency theory. They show that a positive relationship exists between the power of the chairman of the board, the power of the CEO, and the firm’s risk. In order to demonstrate this relationship, Minguez-Vera and Martin-Ugedo (2010) apply three proxies for power. More risky decisions are adopted if: (1) the positions of the CEO and the chairman of the board are vested in the same person, (2) if the CEO or the chairman of the board is the company founder, (3) the larger the share of ownership is of the CEO or the chairman of the board. For all three variables the argument for excessive risk taking lies in the fact that the influence of the CEO or chairman is higher. The first variable reduces the control over managers due to less monitoring of the CEO or the chairman. The other two variables are based on the influential factor of founders and owners of the firm.
Bebchuk and Fried (2003) also describe the role of executive power (‘managerial power approach’). Although they describe the relationship of managerial power on compensation practices and not on risk taking behaviour explicitly, it is founded on a similar concept. According to Bebchuk and Fried (2003) executive compensation is not based on the ‘optimal contracting approach’, where managers are provided with efficient incentives to maximize shareholder value attributable to compensation schemes designed by boards. Optimal contracting is for example not possible because of the significant role a CEO has in re-nomination of the board of directors. Directors are therefore less likely to discuss the level of remuneration of a CEO as long as it is justifiable and defendable to their shareholders. Another reason why optimal contracting does not exist is as a result of not sufficiently strong and fine-tuned market forces. These constraints result in significant deviations from optimal contracting. This gives rise to the ‘managerial power approach’, which states that managers have a substantial influence over their compensation schemes.
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powerful CEO to the long- and short-term firm value. Powerful CEOs are more likely to take on firm risk when their personal wealth is linked to higher levels of future long-term wealth (un-exercisable stock options), where CEOs with more power and their personal wealth coupled with short-term firm value will tend to reduce firm-specific risk.
According to Bebchuk and Fried (2003), the ‘managerial power approach’ is founded on the building block ‘outrage’. The level of power a manager possesses over his or her compensation scheme is determined by the level of outrage the scheme generates among relevant outsiders. Outrage may harm the reputation of the directors or embarrass them, so that they will be more disinclined to approve high compensation schemes. Moreover, managers can be influenced by outrage as well and possibly will not propose a higher remuneration.
Due to the minimal regulation of financial markets, many undesirable practices were able to stay unseen by the public, until the financial crisis uncovered them. As a consequence of the financial crisis, the public outrage led to legal and regulatory changes (Tomasic, 2011). By taking the concept of outrage, described by Bebchuch and Fried (2003), to a broader sense and thus linking it to corporate governance in general, it can be stated that companies are influenced by the public opinion of outsiders. As corporate governance regulation improved just after the corporate scandals at major companies at the beginning of the millennium (e.g. Enron and WorldCom) and in light of the excessive risk taking prior to the financial crisis (Horn, 2012).
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III. Methodology
A. RegressionsIn order to examine the relationship between credit ratings and corporate governance the following panel least squares regression will be tested:
Credit Ratingit = β0 + Σj βj Bank Characteristicsijt + Σk βk Corporate Governance Variablesikt + εit (1)
While the formula includes both bank characteristics and corporate governance variables, these two independent variables will also be tested individually. Moreover, the corporate governance variable is either a proxy of an overall corporate governance score, or four corporate governance attributes2.
Ashbaugh-Skaife et al. (2006) apply an alternative to the regression with the credit ratings as dependent variable. They alter the credit ratings into to the binary variable ‘investment grade’, because of the difficulty in quantifying the marginal effects of changes in each governance variable on credit ratings with multiple categories. Since the banks in this sample have ratings of BBB+ or higher (none of the banks has a rating below BBB-, which Fitch Ratings classifies as speculative), the classification of the two investment grade groups is not the ‘investment’ versus ‘speculative’, but the cut-off point is determined at AA-, dividing banks into two groups; with a high investment grade and with a low investment grade. This results in the binary logit regression model stated below:
Gradeit = β0 + Σj βj Bank Characteristicsijt + Σk βk Corporate Governance Variablesikt + εit (2)
Just like in the first regression model, the corporate governance variables is either an overall governance score or four different corporate governance attributes.
B. The Financial Crisis
In reaction to the financial crisis erupted in 2008, European corporate governance regulation improved due to public outrage (Horn, 2012). The increased attention on corporate governance practices could have strengthened the relationship between the level of corporate governance and
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the credit ratings of European banks. The relationship is tested in a similar manner as the influence of corporate governance on credit ratings described in the preceding paragraph. Hence, a model where the dependent variable is the credit rating, which is tested by applying a panel least squares regression, and a regression where the influence on the investment grade is examined. The last model is investigated using a binary logit regression. The regressions are listed below:
Credit Ratingit = β0 + Σj βj Bank Characteristicsijt + β1 Financial Crisisi + β2 Corporate Governance
Scoreit + β3 Corporate Governance Score*Financial Crisisit + εit (3)
Gradeit = β0 + Σj βj Bank Characteristicsijt + β1 Financial Crisisi + β2 Corporate Governance Scoreit + β3
Corporate Governance Score*Financial Crisisit + εit (4)
To examine the simultaneous effect of the financial crisis and corporate governance on credit ratings an interaction variable is included (Corporate governance score*financial crisis). This interaction effect is only tested for the overall corporate governance score and thus not for the individual corporate governance variables. Additionally, in both regressions the effect of the financial crisis and the corporate governance score on the dependent variable will be tested individually as well as simultaneously with the interaction variable.
IV. Data and European Bank Statistics
A. Sample Selection[10]
within Datastream. Adjustments of the credit ratings for the banks in this sample are only made on yearly basis.
The credit rating data for this study is based on credit ratings compiled by Fitch Ratings. A credit rating is the assessment of the creditworthiness of a bank. These ratings range from AAA (highest rating) to DDD (lowest rating). Following the method of Ashbaugh-Skaife et al. (2006) and Alali et al. (2012) the ratings are categorized, as shown in Table II. Because all banks in this sample are rated BBB or higher, none of the banks are classified with a speculative grade (non-investment grade)3. So the part of the methodology of Ashbaugh-Skaife et al. (2006) and Alali et al. (2012) which applies this binary classification is adjusted for this study. The cut-off point is therefore determined at AA-, this classification of the two investment grade groups is based on high and medium investment grades defined by Fitch Ratings. Within the division of the 234 ratings in this study, 91 ratings are in this high investment grade group. Thus, this variable (Grade) is 1 for investment grades of AA- and higher, and zero otherwise. As opposed to Ashbaugh-Skaife et al. (2006) and Alali et al. (2012), the credit ratings (Credit Rating) are not assigned scores of 1 till 7, but 1 till 24 (see Table II).
B. Independent variables
B.1. Corporate Governance Measures
In line with Alali et al. (2012) a governance score index is used as a proxy for corporate governance. Datastream divides corporate governance into five subcategories, namely board structure, board function, compensation policy, shareholder rights and, vision and strategy. With exception of ‘vision and strategy’, which focuses more on corporate social responsibility, the other four factors are captured into corporate governance attributes of Ashbaugh-Skaife et al. (2006). They list four dimensions of corporate governance attributes that can affect firm’s credit ratings. These are: ownership structure and influence, financial stakeholder rights and relations, financial transparency, and board structure and processes. In order to clarify the relationship between bank’s credit ratings and corporate governance more extensively, not only an overall governance score will be tested, but also different corporate governance attributes within the four dimensions of corporate governance of Ashbaugh-Skaife et al. (2006). Datastream provides
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scores on various corporate governance attributes for the four above stated subcategories of corporate governance. By applying factor analysis on the several scores of corporate governance attributes, the number of variables will be reduced to factors that consist of the most important influences from all of these variables at the same time (Brooks, 2008: 120). Due to missing data of certain corporate governance attributes, 17 variables were excluded from the sample, which resulted in 40 corporate governance attributes available for the factor analysis. Appendix B describes all corporate governance variables of the four corporate governance dimensions of Datastream used for the factor analysis. These tables also provide the factor loadings of each attribute of corporate governance. The method used for compiling the four corporate governance factors is that all corporate governance attributes of a single corporate governance dimension are forced to fit into one factor, which results in the underlying corporate governance dimension provided by Datastream. Moreover, all 40 corporate governance attributes are also forced to fit into one factor (Governance Score), with the intention of creating an overall corporate governance score. In the remaining part of this study Governance Score is used as a proxy for corporate governance and this variable will thus be used to test the relationship between credit ratings and corporate governance.
Table I
Factor Analysis Corporate Governance Attributes
Corporate Governance Variable Chi-Square
Statistic Chi-Square Probability Bartlett Chi-Square Statistic Bartlett Probability Board Structure 60.710 0.000 59.537 0.000 Board Function 118.517 0.000 116.058 0.000 Compensation Policy 157.960 0.000 154.457 0.000 Shareholder Rights 77.667 0.000 76.056 0.000
The factors are formed by forcing all corporate governance attributes into the underlying corporate governance dimension. Extraction method: Maximum Likelihood.
B.2. Control Variables
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bank’s interest coverage (Interest Coverage) measured as the earnings before interest and taxes divided by the interest expense. High values of leverage and low values of interest coverage and return on assets indicate a greater default risk. The size of the bank (Size), which is measured as
Table II Variable Definitions
The rating notches below B- differentiate between Standard & Poor’s and those used by Fitch. However, in line with Ashbaugh-Skaife et al. (2006) and Alali et al. (2012), which forms the methodological base of this study, these ratings are assigned with a rating score of 1. Fitch classifies ratings below BBB- as speculative (non-investment grade). Because none of the banks in this sample have a speculative investment grade, the classification is based on high and medium grade investment grade groups. Therefore, the cut-off point is determined at AA-.
Variable Definition
Bank Characteristics
Credit Rating
The company's credit rating as provided by Fitch: AAA (24 points); AA+ (23 points); AA (22 points); AA- (21 points); A+ (20 points); A (19 points); A- (18 points); BBB+ (17 points); BBB (16 points); BBB- (15 points); BB+ (14 points); BB (13 points); BB- (12 points); B+ (11 points); B (10 points); B- (9 points); CCC+ (8 points); CCC (7 points); CCC- (6 points); CC+ (5 points); CC (4 points); CC- (3 points); C (2 points); D (1 point); DD (1 point); DDD (1 point).
Grade One if the investment grade is equal to AA- or higher, and zero otherwise.
Return On Assets Net income before extraordinary items and preferred dividends divided by total assets.
Leverage Total debt divided by total assets.
Size Natural log of total assets.
Operating Loss One if net income before extraordinary items and preferred dividends in the current
fiscal year is negative, zero otherwise.
Interest Coverage EBIT/interest expense.
Loans/Total Assets Loans divided by total assets.
Deposits/Total Assets Deposits divided by total assets.
Tier 1 Capital Tier 1 capital divided by total risk-weighted assets.
Financial Crisis One in the years 2008-2010, zero otherwise.
Corporate Governance Variables
Governance Score Corporate governance score based on the factor analysis of all 40 corporate
governance attributes scores used in this study.
Board Structure Score on board structure, compiled by applying factor analysis on 9 board structure
attributes scores.
Board Function Score on board function, compiled by applying factor analysis on 10 board function
attributes scores.
Compensation Policy Score on compensation policy, compiled by applying factor analysis on 11
compensation policy attributes scores.
Shareholder Rights Score on shareholder rights, compiled by applying factor analysis on 10 shareholder
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the natural log of total assets, is included as a control variable because size has a positive effect on credit ratings (and thus a negative influence on default risk). Another control variable is the dummy variable Operating Loss that equals one if the operating income before extraordinary items and preferred dividends in the current fiscal year is negative and zero otherwise. Operating loss increases default risk and therefore the chance of debt repayment reduces. The bank’s lending activities (Loans/Total Assets), which is the ratio loans to total assets, is negatively related to the corporate governance structure of banks. Whereas the bank’s deposits (Deposits/Total Assets), which is deposits divided by total assets, should be positively related to credit ratings because deposit financing is not subject to runs with deposit insurance (as opposed to money market funding). The last control variable included in this survey is the ratio tier 1 capital to total risk-weighted assets (Tier 1 Capital). This is because a bank with more capital can respond to adverse shocks more easily and is less hurt by the debt overhang problem.
Moreover, to investigate the additional hypothesis that the financial crisis influences the relationship between the level of corporate governance and credit ratings positively, a dummy variable for the financial crisis (Financial Crisis) is created, which has the value one for the years 2008-2010 and is zero for the preceding years The sign on the coefficient of the variable Financial Crisis is expected to be negative, because the liquidity positions of European banks deteriorated during this period. All variables are listed in Table II together with their definition. You can find a more exhaustive description of the control variables in Appendix C.
C. European Bank Statistics
Table III provides the summary statistics of the bank characteristic as well as the governance score4. Credit Rating is the rating score given by Datastream and thus represents the actual ratings of the banks. The credit ratings of the banks in the sample range between 16 (BBB) and 23 (AA+), with a median of 20 (A+). Hence, all banks have an investment rate credit rating.
Furthermore, when the credit ratings are classified into categories (Grade), it becomes clear that most banks have a credit rating below AA- (medium investment grade), indicated by both mean (0.389) and median (0.000), because Grade can only obtain a value of one or zero. The Governance Score varies significantly between firms, shown by difference between the minimum (-3.239) and the maximum value (1.239) and the large standard deviation of 0.955.
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Table III
European Bank Statistics for the Period 2005-2010
Variables Mean Standard Deviation Median Minimum Maximum
Bank Characteristics Credit Rating 20.137 1.435 20.000 16.000 23.000 Grade 0.389 0.489 0.000 0.000 1.000 Return On Assets 1.194 0.625 1.140 -0.430 2.760 Leverage 39.768 12.129 39.990 11.280 68.520 Size 19.406 1.540 19.000 16.000 22.000 Operating Loss 0.060 0.238 0.000 0.000 1.000 Interest Coverage 2.383 2.627 1.905 -5.184 30.562 Loans/Total Assets 62.000 18.839 66.320 11.020 94.030 Deposits/Total Assets 38.047 12.357 37.210 8.240 71.830 Tier 1 Capital 8.800 2.188 8.120 5.130 17.800
Corporate Governance Variables
Governance Score 0.000 0.955 0.255 -3.239 1.239
Board Structure 0.000 0.929 0.479 -2.139 0.870
Board Function 0.000 0.888 0.365 -2.267 1.118
Compensation Policy 0.000 0.988 0.259 -3.508 0.488
Shareholder Rights 0.000 0.726 0.190 -2.148 1.111
Credit Rating is an ordinal ranking of credit ratings between AAA (24) and DDD (1); Grade is one if the investment grade is
equal to AA- or higher, and zero otherwise; Governance Score is a factor comprising Board Structure, Board Function,
Compensation Policy, and Shareholder Rights. These last four variables are compiled of corporate governance attributes
provided by Datastream, using factor analysis as well. Return On Assets is net income before extraordinary items and preferred dividends divided by total assets; Leverage is total debt divided by total assets; Size is the natural log of total assets; Operating
Loss equals one if net income before extraordinary items and preferred dividends in the current fiscal year is negative, and zero
otherwise; Interest Coverage is earnings before interest and taxes divided by interest expense; Loans/Total Assets is loans divided by total assets; Deposits/Total Assets is deposits divided by total assets; Tier 1 Capital is tier 1 capital divided by total risk-weighted assets.
[15 ] Table IV Correlations Cr ed it Ra tin g G ra d e G o v er n a n ce S co re Bo a rd S tr u ctu re Bo a rd F u n ctio n Co m p en sa tio n Po li cy S h a re h o ld er Rig h ts Re tu rn O n As se ts Le v er a g e S ize O p er a tin g L o ss Inter est Co v er a g e Lo a n s/T o ta l As se ts De p o sits/To ta l As se ts Tier 1 Ca p it a l Fi n a n ci a l Cr isis Credit Rating 1.000 Grade 0.788 1.000 Governance Score 0.413 0.415 1.000 Board Structure 0.381 0.412 0.879 1.000 Board Function 0.310 0.343 0.911 0.858 1.000 Compensation Policy 0.196 0.187 0.621 0.483 0.456 1.000 Shareholder Rights 0.167 0.173 0.625 0.359 0.490 0.372 1.000 Return On Assets -0.020 -0.006 -0.155 -0.115 -0.119 -0.030 -0.174 1.000 Leverage 0.074 0.013 -0.062 -0.038 -0.031 0.104 -0.171 0.417 1.000 Size 0.555 0.523 0.476 0.445 0.391 0.284 0.240 -0.267 -0.158 1.000 Operating Loss 0.072 0.063 0.147 0.137 0.147 0.053 0.067 -0.441 -0.045 0.148 1.000 Interest Coverage -0.178 -0.060 -0.151 -0.095 -0.095 -0.120 -0.053 0.115 -0.250 -0.198 -0.270 1.000 Loans/Total Assets -0.484 -0.458 -0.311 -0.175 -0.193 -0.113 -0.272 0.448 0.349 -0.570 -0.245 0.083 1.000 Deposits/Total Assets -0.554 -0.440 -0.215 -0.166 -0.135 -0.197 0.035 0.070 -0.443 -0.446 -0.177 0.384 0.527 1.000 Tier 1 Capital 0.109 0.190 0.213 0.132 0.165 0.096 0.263 -0.371 -0.174 0.226 0.183 0.065 -0.412 -0.099 1.000 Financial Crisis -0.061 -0.073 0.235 0.196 0.204 0.139 0.185 -0.399 -0.091 0.054 0.217 -0.300 0.041 0.040 0.386 1.000
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the following section. Table IV further shows that Financial Crisis is positively correlated with the corporate governance variables, indicating that the level of corporate governance has increased since the start of the financial crisis in 2008. However, it is also possible that the level of corporate governance is a growing process and thus is improving for a longer period of time. The level of corporate governance can be a positive trend line, for example already since the corporate failure of Enron in 2001. Of all control variables, the dependent variables for the regressions, Credit Rating and Grade, have the highest significant correlations with Size (positive) and Loans/Total Assets and Deposits/Total Assets (both negative).
V. Results
A. Effects on Credit Ratings from 2005 to 2010Table V shows that all models are significant and that the adjusted R² varies between 0.133 and 0.471. Moreover, the full models (model 4 and 5) have the highest R², indicating that the variance in the models can be explained to a large extent. Furthermore, Table V displays that Return On Assets and Size have a significant positive effect on banks’ credit ratings in all models. The impact of an increase of one standard deviation for Return On Assets and Size increases the credit rating of a bank by 0.256 and 0.370 respectively5. In line with the predictions, a higher Return On Assets and a greater Size of banks is associated with higher credit ratings. Of all other bank characteristics, only Loans/Total Assets and Deposits/Total Assets influence banks’ credit ratings negatively at a significant level (p-values: 0.1 and 0.01 respectively). However, the negative influence on credit ratings of a change of one standard deviation of Loans/Total Assets (-0.263) is economically speaking smaller than similar change in Deposits/Total Assets (-0.482). Nevertheless, the credit rating of banks decreases with increasing amount of lending, indicating that the banks held mainly low-risk securities, such as government bonds, instead of loans (Aebi et al., 2012). Contradicting to most theory, I find that the relationship between the amount of deposits and credit ratings is negative. Because deposit financing is not subject to bank runs, a higher level of deposits is related with a lower risk of default. The negative relationship between deposits and credit ratings for banks possibly stems
5
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from the fact that banks that rely more heavily on deposit financing tend to have loans with higher spreads than banks that are actively overall hedgers (Hirtle, 2009). Credit spreads are to a large extent caused by firm-level determinants of default risk (Tang and Yan, 2010).
Hence, higher return on assets, a greater size of the bank and less loans relative to total assets result in a higher credit ratings for banks, whereas the amount of deposits relative to total assets has a negative influence on banks’ credit ratings.
Models 2 and 4 confirm the hypotheses that corporate governance has a positive effect on bank’s credit ratings. Moreover, Board Structure seems to be the most important factor of corporate governance to influence banks’ credit ratings. One standard deviation increase in the level of corporate governance leads to an improvement of the bank’s credit rating by 0.290, and an increase of the same magnitude of the score on Board Structure increases the credit rating by 0.445. However, Board Structure and Board Function are highly correlated (0.858, p-value: 0.01). Brooks (2008: 170-174) describes the problem of high correlated explanatory variables as ‘multicollinearity’. To overcome this problem one of the collinear variables is removed from the regression.6 Appendix F shows the regression results when Board Structure is deleted from the regression. It displays that Board Function also has a significant positive impact on banks’ credit ratings. Because all coefficients in this paragraph are rather small, they do not seem to have economic value. However, the differences between the ratings of banks in the sample do not differ much (standard deviation: 1.435) and even a small change can lead to a higher credit rating. Thus, these variables have a relative large effect on credit ratings. Appendix E shows the same regression as in Table V with cross-section random effects. Because the data for banks’ credit ratings does not change much over time and the cross-section is of particular interest for this study, only a cross-section random effects test is applied as a robustness check. The Governance Score is no longer significant in these models, while Board Structure still is.
Table VI summarizes the effect of corporate governance and bank characteristics on the height of the investment grade of banks. With respect to the bank characteristics, the same variables impact banks’ investment grade as in the panel least squares regression. Return On Assets and Size have a significant positive effect and Loans/Total Assets and Deposits/Total Assets have a negative influence on the height of banks’ investment grade. However, the last two
6 Due to multicollinearity the Governance Score and the four corporate governance attributes are not tested
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Table V
The Effect of Corporate Governance on European Banks' Credit Ratings for the Period 2005-2010
The dependent variable is Credit Rating, which is the ordinal ranking of credit ratings between AAA (24) and DDD (1). Return
On Assets is net income before extraordinary items and preferred dividends divided by total assets; Leverage is total debt divided
by total assets; Size is the natural log of total assets; Operating Loss equals one if net income before extraordinary items and preferred dividends in the current fiscal year is negative, and zero otherwise; Interest Coverage is earnings before interest and taxes divided by interest expense; Loans/Total Assets is loans divided by total assets; Deposits/Total Assets is deposits divided by total assets; Tier 1 Capital is tier 1 capital divided by total risk-weighted assets; Governance Score is a factor comprising Board
Structure, Board Function, Compensation Policy, and Shareholder Rights. These last four variables are compiled of corporate
governance attributes provided by Datastream, using factor analysis as well.
Variable Predicted
Sign
Estimated Coefficient
Model 1 Model 2 Model 3 Model 4 Model 5
Intercept ? 15.884*** 20.137*** 20.137*** 17.674*** 17.915*** Bank Characteristics Return On Assets + 0.428*** 0.409*** 0.423*** Leverage - -0.003 -0.005 -0.002 Size + 0.322*** 0.240*** 0.229*** Operating Loss - 0.005 -0.063 0.003 Interest Coverage + 0.003 0.011 -0.093 Loans/Total Assets - -0.015* -0.014* -0.016** Deposits/Total Assets + -0.036*** -0.039*** -0.039*** Tier 1 Capital + -0.012 -0.026 -0.023
Corporate Governance Variables
Governance Score + 0.639*** 0.304*** Board Structure + 0.610*** 0.479*** Board Function + -0.101 -0.178 Compensation Policy + 0.042 -0.129 Shareholder Rights + 0.140 0.148 R² 0.459 0.181 0.148 0.488 0.500 Adjusted R² 0.438 0.177 0.133 0.466 0.471 F-statistic 22.079 51.258 9.946 21.959 16.997 Probability (F-Statistic) 0.000 0.000 0.000 0.000 0.000
Total Panel Observations 217 234 234 217 217
***, **, and * denote significance at the 0.01, 0.05, and 0.10 levels, respectively. The table’s coefficient estimates are obtained from the following panel least squares regression:
Credit Ratingit = β0 + Σj βj Bank Characteristicsijt + Σk βk Corporate Governance Variablesikt + εit
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Table VI
The Effect of Corporate Governance on the Investment Grade of European Bank’s for the Period 2005-2010
The dependent variable Grade is one if the investment grade is equal to AA- or higher, and zero otherwise. Return On Assets is net income before extraordinary items and preferred dividends divided by total assets; Leverage is total debt divided by total assets; Size is the natural log of total assets; Operating Loss equals one if net income before extraordinary items and preferred dividends in the current fiscal year is negative, and zero otherwise; Interest Coverage is earnings before interest and taxes divided by interest expense; Loans/Total Assets is loans divided by total assets; Deposits/Total Assets is deposits divided by total assets;
Tier 1 Capital is tier 1 capital divided by total risk-weighted assets; Governance Score is a factor comprising Board Structure, Board Function, Compensation Policy, and Shareholder Rights. These last four variables are compiled of corporate governance
attributes provided by Datastream, using factor analysis as well.
Variable Predicted Sign Estimated Coefficient
Model 6 Model 7 Intercept ? -9.772** -6.406 Bank Characteristics Return On Assets + 1.794*** 1.753*** Leverage - 0.009 0.035 Size + 0.532*** 0.357** Operating Loss - 0.116 0.074 Interest Coverage + 0.252 -0.079 Loans/Total Assets - -0.043 -0.075** Deposits/Total Assets + -0.076* -0.052 Tier 1 Capital + 0.108 0.128
Corporate Governance Variables
Governance Score + 1.677*** Board Structure + 2.155*** Board Function + -0.398 Compensation Policy + 0.271 Shareholder Rights + 0.471 McFadden R² 0.439 0.458 LR Statistic 126.761 132.281 Probability (LR Statistic) 0.000 0.000 Observations 217 217
***, **, and * denote significance at the 0.01, 0.05, and 0.10 levels, respectively. The table’s coefficient estimates are obtained from the following binary logit regression:
Gradeit = β0 + Σj βj Bank Characteristicsijt + Σk βk Corporate Governance Variablesikt + εit
[20]
variables are not significant in both models. It further shows that a higher level of corporate governance, and more preciously, a better Board Structure, is related to the height of the investment grade for banks. Thus, a higher level of corporate governance and in particular, a better board structure, gives a higher probability of falling within the high category of the investment grade. This is in line with the results of the panel least squares regression and makes those findings more robust.
The results show that the level of corporate governance has a positive effect on the credit ratings of European banks and that in particular the structure of the board, and implicitly the functions of the board, are the corporate governance factors determining banks’ credit ratings. This is in line with the results of Minguez-Vera and Martin-Ugedo (2010) who showed that board size negatively influences firm risk, because disagreement between members and the accompanying search for consensus, is risk reducing. Firm risk reduces when the size of the board increases, thereby influencing credit ratings positively. Moreover, the findings of this study correspond to the research of Ashbaugh-Skaife et al. (2006) and Alali et al. (2012). Both studies showed that corporate governance is a predictor of credit ratings. The research of Ashbaugh-Skaife et al. (2006) particularly shows related outcomes with respect to board characteristics. They show that board structure and processes like board independence, board expertise, and ownership by directors have a positive impact on the credit ratings of firms. These governance features are of influence due to the board’s role and ability to independently oversee the performance of the management and to hold the management accountable for their actions. This reduces agency risk and increases the expected value of the cash flows.
B. The Effect of the Financial Crisis
[21]
credit rating for banks. However, the financial crisis did have an amplifying effect on the relationship between corporate governance and the credit ratings of banks.
The binary logit regression with respect to the impact of the financial crisis on the relationship between corporate governance and the investment grade of banks shows the same picture as in the panel least squares regressions. Return On Assets, Size and Deposits/Total Assets are the only bank characteristics which have an influence on the height of the investment grade of banks and the financial crisis negatively influences the height of the investment grade, but only in the model without bank characteristics. Moreover, the level of corporate governance is positively related to the investment grade of banks, indicating that banks in the high investment grade group have a better level of corporate governance. Also in these three models the effect of the financial crisis on the relationship between the level of corporate governance and the credit ratings of banks is not identifiable.
[22]
Table VII
The Effect of the Financial Crisis on the Relationship between Corporate Governance and Credit Ratings of European Bank’s during the Period 2008-2010
The dependent variable is Credit Rating, which is the ordinal ranking of credit ratings between AAA (24) and DDD (1). Return
On Assets is net income before extraordinary items and preferred dividends divided by total assets; Leverage is total debt divided
by total assets; Size is the natural log of total assets; Operating Loss equals one if net income before extraordinary items and preferred dividends in the current fiscal year is negative, and zero otherwise; Interest Coverage is earnings before interest and taxes divided by interest expense; Loans/Total Assets is loans divided by total assets; Deposits/Total Assets is deposits divided by total assets; Tier 1 Capital is tier 1 capital divided by total risk-weighted assets; Governance Score is a factor comprising Board
Structure, Board Function, Compensation Policy, and Shareholder Rights. These last four variables are compiled of corporate
governance attributes provided by Datastream, using factor analysis as well.
Variable Predicted Sign
Estimated Coefficient
Model 8 Model 9 Model 10
Intercept ? 20.329*** 17.686*** 17.680*** Bank Characteristics Return On Assets + 0.395** 0.397** Leverage - -0.005 -0.005 Size + 0.239*** 0.239*** Operating Loss - -0.065 -0.073 Interest Coverage + 0.008 0.008 Loans/Total Assets - -0.013 -0.013 Deposits/Total Assets + -0.040*** -0.039*** Tier 1 Capital + -0.021 -0.022 Financial Crisis - -0.411** -0.048 -0.049
Corporate Governance Variables
Financial Crisis*Governance Score + 0.111 0.048
Governance Score + 0.662*** 0.309*** 0.295***
R² 0.200 0.489 0.489
Adjusted R² 0.190 0.464 0.461
F-statistic 19.183 19.679 17.816
Probability (F-Statistic) 0.000 0.000 0.000
Total Panel Observations 234 217 217
***, **, and * denote significance at the 0.01, 0.05, and 0.10 levels, respectively. The table’s coefficient estimates are obtained
from the following panel least squares regression: Credit Ratingit = β0 + Σj βj Bank Characteristicsijt + β1 Financial Crisisi + β2
[23]
Table VIII
The Effect of the Financial Crisis on the Relationship between Corporate Governance and the Investment Grade of European Bank’s during the Period 2008-2010
The dependent variable Grade is one if the investment grade is equal to AA- or higher, and zero otherwise. Return On Assets is net income before extraordinary items and preferred dividends divided by total assets; Leverage is total debt divided by total assets; Size is the natural log of total assets; Operating Loss equals one if net income before extraordinary items and preferred dividends in the current fiscal year is negative, and zero otherwise; Interest Coverage is earnings before interest and taxes divided by interest expense; Loans/Total Assets is loans divided by total assets; Deposits/Total Assets is deposits divided by total assets;
Tier 1 Capital is tier 1 capital divided by total risk-weighted assets; Governance Score is a factor comprising Board Structure, Board Function, Compensation Policy, and Shareholder Rights. These last four variables are compiled of corporate governance
attributes provided by Datastream, using factor analysis as well.
Variable Predicted
Sign
Estimated Coefficient
Model 11 Model 12 Model 13
Intercept ? -0.388 -10.104** -10.098** Bank Characteristics Return On Assets + 1.719*** 1.729*** Leverage - 0.006 0.006 Size + 0.534*** 0.535*** Operating Loss - 0.250 0.262 Interest Coverage + 0.090 0.093 Loans/Total Assets - -0.037 -0.037 Deposits/Total Assets + -0.079*** -0.079* Tier 1 Capital + 0.170 0.165 Financial Crisis - -0.760** -0.464 -0.511
Corporate Governance Variables
Financial Crisis*Governance Score + 0.133 0.197
Governance Score + 1.589*** 1.717*** 1.658***
McFadden R² 0.192 0.442 0.442
LR Statistic 59.972 127.559 127.623
Probability (LR Statistic) 0.000 0.000 0.000
Observations 234 217 217
***, **, and *denote significance at the 0.01, 0.05, and 0.10 levels, respectively. The table’s coefficient estimates are obtained
from the following binary logit regression: Gradeit = β0 + Σj βj Bank Characteristicsijt + β1 Financial Crisisi + β2 Corporate
[24]
VI. Summary and Conclusions
In this article the relationship between corporate governance and credit ratings is investigated for 39 continental European banks during the period 2005 to 2010. The results show that a better corporate governance structure has a positive influence on the credit ratings of European banks and that improving corporate governance features of banks can lead to a higher credit rating. Especially the board structure, and more implicitly the function of the board, are determinants of banks’ credit ratings. This is in line with the study of Minguez-Vera and Martin-Ugedo (2010), who showed that the size of the board negatively influences firm risk, because disagreement between members and the accompanying search for consensus is risk reducing, and this relationship is strengthened when board size increases. Moreover, the findings of this research correspond to the study of Ashbaugh-Skaife et al. (2006). They show that board structure and processes influence credit ratings positively due to the board’s role in reducing agency risk and thereby increasing the expected value of the cash flows.
[25]
reaction to the financial crisis. Still, the effect could be blurred due to time needed to construct and implement these regulations and the role of camouflage.
Hence, the results of this thesis show that the level of corporate governance, and more specifically the structure and the function of the board, are predictors of banks’ credit ratings. The financial crisis however did not have an amplifying effect on the relationship between corporate governance and credit ratings for continental European banks.
Because the credit rating data does not change much over time it forms a limitation for investigating the relationship between the level of corporate governance and banks’ credit ratings, especially with respect to the examining of the influence of the financial crisis on the relationship between corporate governance and credit ratings. The credit rating data compiled from Datastream is measured yearly and does not vary considerably between years. Another constraint is the lack of data for corporate governance variables of banks. A large part of the original sample is deleted due to missing data. Additionally, the results are not tested for endogeneity. Although prior research of Ashbaugh-Skaife et al. (2006) and Alali et al. (2012), which forms the methodological base of this study, show that correlated omitted variables not drive the result that corporate governance has a positive effect on credit ratings. However, an omitted variable could impact both corporate governance and credit ratings.
Future research could focus on the role of outrage on the relationship between corporate governance and credit ratings, with the emphasis on the risk taking features of corporate governance determinants. Moreover, this study shows that the role of deposit financing in relationship to credit ratings is still not clear.
References
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Ashbaugh-Skaife, H., D.W. Collins, and R. LaFond (2006), “The Effects of Corporate Governance on Firms’ Credit Ratings”, Journal of Accounting & Economics, Vol. 42, Issue 1/2, pp. 203-243.
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Books
Brooks (2008), “Introductory Econometrics for Finance”, 2nd
[28]
Appendix A. Banks
Table AI List of Banks
Name Market
1 Alpha Bank SA Greece
2 Banca Carige SpA Italy
3 Banca Monte dei Paschi di Siena SpA Italy
4 Banca Popolare di Milano Scarl Italy
5 Banca BPI SA Portugal
6 Banco Comercial Portugues SA Portugal
7 Banco de Sabadell SA Spain
8 Banco de Valencia SA Spain
9 Banco Espanol de Credito SA Spain
10 Banco Espirito Santo SA Portugal
11 Banco Popular Espanol SA Spain
12 Banco Santander SA Spain
13 Bank of Ireland Ireland
14 Bank of Piraeus SA Greece
15 Banco Intercontinental Espanol SA Spain 16 Banco Bilbao Vizcaya Argentaria SA (BBVA) Spain 17 Banque Nationale de Paris (BNP) Paribas SA France
18 Commerzbank AG Germany
19 Credit Agricole SA France
20 Credit Suisse Group AG Switzerland
21 Danske Bank A/S Denmark
22 Deutsche Bank AG Germany
23 Deutsche Postbank AG Germany
24 Dexia SA Belgium
25 Erste Group Bank AG Austria
26 Eurobank Ergasias SA Greece
27 Intesa SanPaulo SpA Italy
28 Jyske Bank A/S Denmark
29 National Bank of Greece SA Greece
30 Natixis SA France
31 Nordea Bank AB Sweden
32 Pohjola Pankki Oyj Finland
33 Skandinaviska Enskilda Banken AB (SEB) Sweden
34 Societe Generale SA France
35 Svenska Handelsbanken AB Sweden
36 Swedbank AB Sweden
37 United Bank of Switzerland AG (UBS) Switzerland
38 UniCredit SpA Italy
[29]
Appendix B. Corporate Governance Attributes
Table BI
Description Board Structure Governance Attributes
Corporate Governance Attribute Factor
Loadings Datastream Description
Background and Skills 0.282
Does the company describe the professional experience or skills of every board member? Or does the company provide information about the age of individual board members?
CEO-Chairman Separation -0.140 Does the CEO simultaneously chair the board? And has the chairman of the board been the CEO of the company?
Implementation 0.812 Does the company describe the implementation of its balanced board structure policy?
Improvements 0.356 Does the company have the necessary internal improvement and information tools to develop balanced board structure?
Individual Re-election -0.294 Are all board members individually subject to re-election (no classified or staggered board structure)?
Mandates Limitation 0.233
Does the company provide information about the other mandates of individual board members? And does the company stipulate a limit of the number of years of board membership?
Monitoring 0.885 Does the company monitor the board functions through the establishment of a nomination committee?
Policy 0.296 Does the company have a policy for maintaining a well-balanced membership of the board?
[30]
Table BII
Description Board Function Governance Attributes
Corporate Governance Attribute Factor
Loadings Datastream Description
Audit Committee Expertise 0.401
Does the company have an audit committee with at least three members and at least one "financial expert" within the meaning of Sarbanes-Oxley?
Audit Committee Management
Independence 0.184 Does the company report that all audit committee members are non-executives?
Board Attendance 0.076 Does the company publish information about the attendance of the individual board members at board meetings?
Compensation Committee
Management Independence 0.166 Does the company report that all compensation committee members are non-executives?
Implementation 0.477 Does the company describe the implementation of its board functions policy?
Improvements 0.461 Does the company have the necessary internal improvement and information tools to develop appropriate and effective board functions?
Monitoring 0.352 Does the company monitor the board functions through the establishment of a corporate governance committee? Nomination Committee
Management Independence 0.761 Are the majority of the nomination committee members non-executives?
Nomination Committee Processes 0.656
Does the nomination committee have the responsibility for the selection, appointment and succession procedures for board members or executives? Or does the company report or show to constantly supervise the performance of board members or executives?
[31]
Table BIII
Description Compensation Policy Governance Attributes
Corporate Governance Attribute Factor
Loadings Datastream Description
Compensation Controversies -0.063
Is the company under the spotlight of the media because of a controversy linked to high executive or board compensation?
Implementation 0.962 Does the company describe the implementation of its compensation policy?
Improvements 0.159 Does the company have the necessary internal improvement and information tools to develop attractive and performance-oriented compensation policy?
Individual Compensation 0.082 Does the company provide information about the total individual compensation of all executives and board members
Long Term Objectives 0.002 Is the management and board members remuneration partly linked to objectives or targets which are more than two years forward looking?
Monitoring 0.977 Does the company monitor the senior executives and board compensation through the establishment of a compensation committee?
Policy 0.175 Does the company have a policy for performance-oriented compensation that attracts and retain the senior executives and board members?
Remuneration Structure 0.197 Does the company subdivide the remuneration of executives according to fixed salaries, bonuses and stock option plans (or restricted stocks)?
Stock Compensation 0.163 Do the company's most recently granted stocks or stock options vest in a three-year period at a minimum?
Stock Option Program 0.086 Does the company's statutes or by-laws require that stock-options are only granted with a vote at a shareholder meeting?
Sustainability Compensation
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Table BIV
Description Shareholder Rights Governance Attributes
Corporate Governance Attribute Factor
Loadings Datastream Description
Anti-Takeover Devices -0.316 The number of anti-takeover devices in place in excess of two.
Available Articles of Association 0.287 Are the company's articles of association, statues or by laws publicly available or on request?
Implementation 0.610 Does the company describe the implementation of its shareholder rights policy?
Improvements 0.100 Does the company have the necessary internal improvement and information tools to develop appropriate shareholder rights principles?
Monitoring 0.328 Does the company monitor the shareholder rights through the establishment of a corporate governance committee?
Ownership 0.092 Is the company owned by a reference shareholder who has the majority of the voting rights, veto power or golden share?
Policy 0.354
Does the company have a policy for ensuring equal treatment of minority shareholders, facilitating shareholder engagement or limiting the use of anti-takeover devices?
Share Structure -0.149 Is the company's outstanding equity constituted of 100% common stocks?
Shareholder Controversies -0.057 Is the company under the spotlight of the media because of a controversy linked to shareholders rights?
[33]
Appendix C. Control Variables
Table CI
Description Control Variables and Governance Score
Variable Definition Datastream Description
Return On Assets Net income before extraordinary items and preferred dividends divided by total assets
(Net Income before Preferred Dividends + ((Interest Expense on Debt-Interest Capitalized) * (1-Tax Rate))) / (Last Year's Total Assets - Last Year's Customer Liabilities on Acceptances) * 100 Customer Liabilities on Acceptances only subtracted when included in Total Assets.
Leverage Total debt divided by total assets
(Short Term Debt & Current Portion of Long Term Debt + Long Term Debt) / (Total Assets - Customer Liabilities on Acceptances) * 100
Customer Liabilities on Acceptances only subtracted when included in Total Assets.
Size Natural log of total assets Total assets represent the sum of cash & due from banks, total investments, net loans, customer liability on acceptances (if included in total assets), investment in unconsolidated subsidiaries, real estate assets, net property, plant and equipment and other assets.
Operating Loss One if net income before extraordinary items and preferred dividends in the current fiscal year is negative, zero otherwise
Net income before extraordinary items and preferred dividends represents income before extraordinary items and preferred and common dividends, but after operating and non-operating income and expense, reserves, income taxes, minority interest and equity in earnings.
If a company reports discontinued operations it is treated as follows:
a. If the discontinued operations are purely an operating gain or loss on a business segment the company is discontinuing, income including the discontinued operations will be shown.
b. If the discontinued operations include disposal (gain or loss on a sale), then earnings per share is examined. If a separate per share amount is shown for discontinued operations and a separate per share amount is shown for disposal, the discontinued operations portion is included in net income and the disposal portion is treated as an extraordinary charge or credit. If one per share amount for discontinued operations is reported and it includes disposal, then net income before discontinued operations is shown and the discontinued operations is treated as an extraordinary item.
[34]
Table CI (continued)
Variable Definition Datastream Description
Loans/Total Assets
Loans divided by total assets
Loans-Total / (Total Assets - Customer Liabilities on Acceptances) *100
Customer Liabilities on Acceptances only subtracted when included in Total Assets.
Deposits/Total Assets
Deposits divided by total assets
Deposits-Total / (Total Assets - Customer Liabilities on Acceptances) * 100
Customer Liabilities on Acceptances only subtracted when included in Total Assets.
Tier 1 Capital Tier 1 capital divided by total risk-weighted assets
[35]
Appendix D. Bank Characteristics
Table DI
Extensive European Bank Statistics for the Period 2005-2010
Credit Rating is an ordinal ranking of credit ratings between AAA (24) and DDD (1); Grade is one if the investment grade is
equal to AA- or higher, and zero otherwise; Governance Score is a factor comprising Board Structure, Board Function,
Compensation Policy, and Shareholder Rights. These last four variables are compiled of corporate governance attributes
provided by Datastream, using factor analysis as well. Return On Assets is net income before extraordinary items and preferred dividends divided by total assets; Leverage is total debt divided by total assets; Size is the natural log of total assets; Operating
Loss equals one if net income before extraordinary items and preferred dividends in the current fiscal year is negative, and zero
otherwise; Interest Coverage is earnings before interest and taxes divided by interest expense; Loans/Total Assets is loans divided by total assets; Deposits/Total Assets is deposits divided by total assets; Tier 1 Capital is tier 1 capital divided by total risk-weighted assets.
Variables Skewness Kurtosis Jarque-Bera Probability
Bank Characteristics Credit Rating -0.188 2.682 2.369 0.306 Grade 0.456 1.208 39.421 0.000 Return On Assets 0.031 2.613 1.440 0.487 Leverage -0.201 2.766 2.079 0.354 Size 0.071 1.803 14.157 0.001 Operating Loss 3.712 14.778 1,889.854 0.000 Interest Coverage 6.344 62.905 35,777.242 0.000 Loans/Total Assets -0.934 3.212 34.017 0.000 Deposits/Total Assets 0.131 3.031 0.670 0.715 Tier 1 Capital 1.317 5.002 105.359 0.000
Corporate Governance Variables
Governance Score -1.317 4.196 81.597 0.000
Board Structure -1.222 2.798 58.675 0.000
Board Function -1.007 2.890 39.679 0.000
Compensation Policy -3.090 10.745 957.201 0.000
