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Corporate Governance and Financial Stability in US Banks: Do Indirect Interlocks Matter?

Lookup NU author(s): Dr Roba Abdelbadie, Dr Aly SalamaORCiD

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This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License (CC BY-NC-ND).

Abstract

In the context of the Depository Institution Management Interlocks Act of 1978 (Interlocks Act), we investigate the structure and implications of the professional connections among bank directors. Based on a hand-collected unique dataset for a sample of 168 US commercial banks listed continuously from 2009 to 2015, we find that the barriers set out in the Interlocks Act have been circumvented by the establishment of indirect interlocks that allow for mass professional connections among bank directors. Our evidence suggests that bank well-connectedness through indirect interlocks has a significant impact on financial stability. In particular, we find, in support of the extended resource-based view (RBV), that well-connected banks mitigate their credit and insolvency risks but, contrary to our expectation, lower bank capitalisation. Our evidence suggests that the Interlocks Act and bank governance reforms need to consider the role of professional communications among bank directors to fully achieve their intended goals.

Publication metadata

Author(s): Abdelbadie R, Salama A

Publication type: Article

Publication status: Published

Journal: Journal of Business Research

Year: 2019

Volume: 104

Pages: 85-105

Print publication date: 01/11/2019

Online publication date: 11/07/2019

Acceptance date: 29/06/2019

Date deposited: 30/06/2019

ISSN (print): 0148-2963

ISSN (electronic): 0148-2963

Publisher: Elsevier

URL: https://doi.org/10.1016/j.jbusres.2019.06.047

DOI: 10.1016/j.jbusres.2019.06.047

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