Managerial Ability as a Tool for Prudential Regulation

Abstract

The new prudential regulation framework, established by the European Central Bank (ECB) after the financial crisis, encompasses supervisory procedures to measure and monitor banks business model, capital requirements, governance control and liquidity risk. However, research on financial stability has revealed that during the financial crisis it would have been essential to assess bank’s vulnerability to consider also the value of intangibles. We contribute to this literature by examining the impact of a specific intangible, namely the managerial ability, to the bank risk-taking. Managers play an important role in the bank decisions and the impact of their ability on risk-taking has not been taking into account in the new prudential regulation framework. By using a sample of the listed bank of fifteen European Union countries over the period 1997-2016, we evaluate drivers of bank risk-taking and the mechanism available to supervisors and regulators to maintain stability by using market-based performance metrics and analysing the role of the manager’s ability on risk-taking. Our results show that managerial ability seems to be not only a driver of bank risk-taking but also the disciplinary role of franchise value on risk-taking may be regulated through managerial ability.

Keywords: Managerial ability; Franchise Value; Risk; Financial stability; Regulation

JEL Classification: G21, G28, G32, G38, M10