(Luận án tiến sĩ) Cơ chế quản trị và rủi ro ngân hàng ở khu vực ASEAN

MINISTRY OF EDUCATION AND TRAINING OF VIETNAM
UNIVERSITY OF ECONOMICS HO CHI MINH CITY

NGUYỄN QUANG KHẢI

CORPORATE GOVERNANCE AND BANK
RISK IN ASEAN COUNTRIES

PHD THESIS

HO CHI MINH CITY-2022


MINISTRY OF EDUCATION AND TRAINING OF VIETNAM
UNIVERSITY OF ECONOMICS HO CHI MINH CITY

NGUYỄN QUANG KHẢI

CORPORATE GOVERNANCE AND BANK
RISK IN ASEAN COUNTRIES
SPECIALIZATION: FINANCE AND BANKING
CODE: 9340201

PHD THESIS
SUPERVISORS:
1. LÊ HỒ AN CHÂU, Ph.D.
2. PHẠM PHÚ QUỐC, Ph.D.

HO CHI MINH CITY-2022

iii

STATEMENT OF AUTHORSHIP
My name is Nguyen Quang Khai, PhD student in the major of Banking at
University of Economics Ho Chi Minh City (UEH)
I declare that ―this thesis is my own work, and except where due reference is
made, contains no material previously written or published by any other people. I
ensure that this thesis has not been, and will not be, submitted in whole or in part to
any ther educational institution for the award of any other degree.‖

Ho Chi Minh City, 2022

Nguyen Quang Khai


iv

ACKNOWLEDGMENTS
First, I would like to thank my academic advisers Dr. Le Ho An Chau and
Dr. Pham Phu Quoc for their enthusiastic help, instruction, intensive support, care,
and advice on my research. They have granted me the autonomy to conduct and
publish my research while continuing to review and provide me with exhaustive
valuable feedback and encouragement.
Second, I would like to sincerely thank the School of Banking and the UEH
university for providing me with the best study and research environment. I would
also like to thank my professors, the journal‘s editor, and the independent external
reviewers for giving me numerous useful comments on my research. All their
comments helped me improve and complete my thesis.
Lastly, I am extremely grateful to my family for their love, support, and
sacrifice, as well as to my friends and colleagues who have encouraged and

supported me very much during the learning process, work, and completion of this
thesis.

Ho Chi Minh City, 2022

Nguyen Quang Khai


v

TABLE OF CONTENTS
STATEMENT OF AUTHORSHIP ......................................................................................iii
ACKNOWLEDGMENTS .................................................................................................... iv
TABLE OF CONTENTS....................................................................................................... v
ABBREVIATIONS ............................................................................................................... x
LIST OF TABLES ................................................................................................................ xi
LIST OF FIGURES .............................................................................................................xii
ABSTRACT........................................................................................................................xiii
TÓM TẮT ............................................................................................................................ xv
CHAPTER 1: INTRODUCTION .......................................................................................... 1
1.1

Introduction ........................................................................................................... 1

1.2

Background and Motivation ................................................................................ 2

1.2.1 Corporate governance and bank risk in ASEAN ............................................. 2
1.2.2 Background of literature on corporate governance and bank risk ................ 6

1.3

Research Objectives and Questions ................................................................... 16

1.4

Data and Research Design .................................................................................. 18

1.5

Scope of Research ................................................................................................ 19

1.6

Contribution of the Thesis .................................................................................. 19

1.7

Structure of the Thesis ........................................................................................ 21

CHAPTER 2: THEORY AND LITERATURE REVIEW .................................................. 23
2.1 Introduction .............................................................................................................. 23
2.2 Bank Risk and Risk Governance Structure........................................................... 24
2.2.1 Bank risks ........................................................................................................... 24
2.2.1.1 Risk and different types of risk within the banking sector. .......................... 24
2.2.1.2 Bank risk-taking. ........................................................................................... 26
2.2.1.3 Bank risk management effectiveness. ........................................................... 26
2.2.2 Corporate governance and bank risk governance ......................................... 28
2.2.2.1 Board of directors ......................................................................................... 30
2.2.2.2 Audit committee and external audit .............................................................. 31

2.2.2.3 Stand-alone risk committee .......................................................................... 32
2.3 Bank Risk Governance Structure Theory and Evidence ..................................... 33


vi

2.3.1 Scope of operation theory ................................................................................. 34
2.3.2 Monitoring theory ............................................................................................. 35
2.3.3 Negotiation theory ............................................................................................. 37
2.3.4 Hypothesis related to RQ1 ................................................................................ 39
2.3.4.1 Risk governance structure and bank scope of operation ............................... 40
2.3.4.2 Risk governance structure and the trade-off between monitoring cost and
benefit ....................................................................................................................... 41
2.3.4.3 Risk governance structure and CEO‘s negotiation power ............................ 43
2.4 Bank Risk-Taking Theory and Evidence ............................................................... 45
2.4.1 Moral hazard theory ......................................................................................... 46
2.4.2 Agency theory .................................................................................................... 50
2.4.3 Stakeholder theory ............................................................................................ 52
2.4.4 Institutional theory ............................................................................................ 53
2.4.5 Hypothesis related to RQ2 ................................................................................ 55
2.4.5.1 Risk governance structure and risk taking .................................................... 55
2.4.5.2 Risk governance effectiveness and bank risk-taking .................................... 59
2.4.5.3 Institutional quality and the risk oversight role of risk governance ............. 59
2.5 Bank Risk Management Theory and Evidence ..................................................... 60
2.5.1 Option theory ..................................................................................................... 61
2.5.2 Hypothesis related to RQ3 ................................................................................ 61
2.6 Chapter Summary .................................................................................................... 62
CHAPTER 3: RESEARCH METHODOLOGY ................................................................. 64
3.1 Introduction .............................................................................................................. 64
3.2 Research Data ........................................................................................................... 65

3.3 Methodology for Determinants of Bank Risk Governance Structure (related to
RQ1) ................................................................................................................................ 66
3.3.1 Variable measures ............................................................................................. 67
3.3.1.1 Measures of bank risk governance structure................................................. 67
3.3.1.2 Measures of ―scope of operation‖ ................................................................. 69
3.3.1.3 Measures of private benefits and monitoring costs ...................................... 70
3.3.1.4 Measures of CEO‘s negotiation power ......................................................... 71
3.3.1.5 Measures of other control variables .............................................................. 71


vii

3.3.2 Empirical model and estimation methods ....................................................... 72
3.3.2.1 Empirical model ............................................................................................ 72
3.3.2.2 Estimation methods....................................................................................... 76
3.4 Methodology for Relationship between Bank Risk Governance Structure and
Risk-Taking (related to RQ2) ....................................................................................... 78
3.4.1 Variables measures ............................................................................................ 78
3.4.1.1 Measures of bank risk-taking ........................................................................ 78
3.4.1.2 Measures of bank risk governance structure and its effectiveness ............... 80
3.4.1.3 Measures of other control variables and interaction variables ..................... 84
3.4.2 Empirical model and estimation methods ....................................................... 87
3.4.2.1 Empirical model ............................................................................................ 87
3.4.2.2 Estimation methods....................................................................................... 89
3.5 Methodology for the Relationship between Bank Risk Governance and Risk
Management Effectiveness (related to RQ3) ............................................................... 90
3.5.1 Variable measures ............................................................................................. 90
3.5.1.1 Bank performance measures ......................................................................... 90
3.5.1.2 Other variables .............................................................................................. 91
3.5.2 Empirical model and estimation method ........................................................ 93

3.5.2.1 Empirical model ............................................................................................ 93
3.5.2.2 Estimation methods....................................................................................... 94
3.6 Chapter Summary .................................................................................................... 95
CHAPTER 4: EMPIRICAL RESULT AND DISCUSSION .............................................. 97
4.1 Introduction .............................................................................................................. 97
4.2 Descriptive Statistics and Correlation Matrix ....................................................... 97
4.2.1 Descriptive statistics .......................................................................................... 98
4.2.2 Correlation matrix........................................................................................... 100
4.3 Determinants of Bank Risk Governance Structure: Empirical Results (RQ1) 103
4.3.1 Regression results for RQ1 ............................................................................. 104
4.3.1.1 Scope of operation and bank risk governance structure results .................. 104
4.3.1.2 Trade-off between monitoring cost and benefit and risk governance structure
results ...................................................................................................................... 105
4.3.1.3 CEO‘s negotiation power and risk governance structure results ................ 107


viii

4.3.2 Robustness tests for RQ1 ................................................................................ 111
4.4 Bank Risk Governance and Risk-Taking: Empirical Results (RQ2) ................ 113
4.4.1 Bank risk governance and insolvency risk .................................................... 113
4.4.2 Bank risk governance and credit risk ............................................................ 118
4.4.3 Bank risk governance and operational risk .................................................. 120
4.4.4 Institutional quality and Risk governance structure-Risk taking relation 124
4.4.5 Robustness tests for RQ2 ................................................................................ 126
4.4.5.1 Bank risk governance and risk-taking prior to and following the 2008 crisis
................................................................................................................................ 127
4.4.5.2 Alternatives to risk-taking measures........................................................... 132
4.5 Bank Risk Governance Structure and Risk Management Effectiveness:
Empirical Results (RQ3).............................................................................................. 139

4.5.1 Main result ....................................................................................................... 139
4.5.2 Robustness test ................................................................................................. 145
4.6 Chapter Summary .................................................................................................. 147
CHAPTER 5: CONCLUSION .......................................................................................... 149
5.1 Introduction ............................................................................................................ 149
5.2 Review of the Research Questions, Hypotheses, and Findings .......................... 149
5.2.1 Research question 1 ......................................................................................... 149
5.2.2 Research question 2 ......................................................................................... 152
5.2.3 Research question 3 ......................................................................................... 154
5.3 Academic Contribution ......................................................................................... 155
5.4 Policy Implications ................................................................................................. 157
5.5 Limitations of the Thesis ....................................................................................... 159
5.6 Future Research Directions ................................................................................... 160
LIST OF AUTHOR‘S PUBLICATIONS AND RESEARCH PROJECTS ...................... 161
REFERENCES .................................................................................................................. 163
Appendix 1: Estimation result of Table 4.3 by STATA 15 ............................................... 176
Appendix 2: Estimation result of Table 4.4 by STATA 15 ............................................... 179
Appendix 3: System GMM Estimation result, Arellano-Bond test and Hansen test of table
4.5 by STATA 15............................................................................................................... 182


ix

Appendix 4: System GMM Estimation result, Arellano-Bond test and Hansen test of table
4.6 by STATA 15............................................................................................................... 186
Appendix 5: System GMM Estimation result, Arellano-Bond test and Hansen test of table
4.7 by STATA 15............................................................................................................... 190
Appendix 6: System GMM Estimation result, Arellano-Bond test and Hansen test of table
4.8 by STATA 15............................................................................................................... 194
Appendix 7: System GMM Estimation result, Arellano-Bond test and Hansen test of table

4.9 by STATA 15............................................................................................................... 196
Appendix 8: System GMM Estimation result, Arellano-Bond test and Hansen test of table
4.10 by STATA 15............................................................................................................. 199
Appendix 9: System GMM Estimation result, Arellano-Bond test and Hansen test of table
4.11 by STATA 15............................................................................................................. 203
Appendix 10: System GMM Estimation result, Arellano-Bond test and Hansen test of table
4.12 by STATA 15............................................................................................................. 207
Appendix 11: System GMM Estimation result, Arellano-Bond test and Hansen test of table
4.13 by STATA 15............................................................................................................. 211
Appendix 12: System GMM Estimation result, Arellano-Bond test and Hansen test of table
4.14 by STATA 15............................................................................................................. 215
Appendix 13: System GMM Estimation result, Arellano-Bond test and Hansen test of table
4.15 by STATA 15............................................................................................................. 217
Appendix 14: System GMM Estimation result, Arellano-Bond test and Hansen test of table
4.16 by STATA 15............................................................................................................. 221
Appendix 15: Further Test for FE/RE Models .................................................................. 225
Appendix 16: Data of Institutional Quality ....................................................................... 227


x

ABBREVIATIONS
ASEAN: Association of South East Asian Nations
2SLS: Two stage least square
BCBS: Basel Committee on Banking Supervision
BOD: Board of director
CEO: Chief Executive Officer.
Cons: Constants
FE: Fixed effect
H: Hypothesis

IMF: International Monetary Fund
IOSCO: International Organization of Securities Commissions
LM: Lagrange Multiplier
M&A: Mergers and acquisitions
NPV: Net-present-value
NYSE: New York Stock Exchange
Obs: Observation
RE: Random effect
RQ: Research question
SGMM: System generalized method of moments
SOX:Sarbanes-Oxley Act of 2002


xi

LIST OF TABLES
Table 2.1: Research Questions and Related Hypotheses ..................................................... 63
Table 3.1: Summary of Banks and Observations by Country ............................................. 66
Table 3.2: Summary of Definition, Source and Predicted Signs of Variables for Equations
3.3 ........................................................................................................................................ 74
Table 3.3: Definition of the Risk Governance Effectiveness Index (RGDEX) ................... 83
Table 3.4: Summary of Definitions, Predicted Sign of Variables for Equations 3.5 and 3.6
............................................................................................................................................. 86
Table 3.5: Summary of Definitions, Predicted Sign of Variables for Equations 3.7........... 94
Table 3.6: Summary Testing Procedures for the Hypotheses Associated with RQ1, RQ2,
and RQ3 ............................................................................................................................... 96
Table 4.1: Descriptive Statistics for Main Variables ........................................................... 99
Table 4.2: Correlation Matrix ............................................................................................ 101
Table 4.3: Determinants of Risk Governance Structure Results ....................................... 110
Table 4.4: Two-Stage Least Square (2SLS) Regression Results for the Determinants of

Risk Governance Structure ................................................................................................ 112
Table 4.5: System GMM Regression Results for Risk Governance and Insolvency Risk 117
Table 4.6: System GMM Regression Results for Risk Governance and Credit Risk ....... 119
Table 4.7: System GMM Regression Results for Risk Governance and Operational Risk
........................................................................................................................................... 123
Table 4.8: System GMM Regression Results for Institutional Quality and Risk Governance
Effectiveness-Risk taking Relation. ................................................................................... 125
Table 4.9: System GMM Regression Results for Risk Governance and Bank Risk in PreCrisis 2008 ......................................................................................................................... 129
Table 4.10: System GMM Regression Results For Risk Governance and Bank Risk in
Post-Crisis 2008 ................................................................................................................. 131
Table 4.11: Robustness Test for Risk Governance and Insolvency Risk .......................... 133
Table 4.12: Robustness Test for Risk Governance and Credit Risk .................................. 135
Table 4.13: Robustness Test for Risk Governance and Operational Risk ......................... 137
Table 4.14: Results for the Institutional Quality and Risk Governance Effectiveness-Risk
taking Relationship using Alternative Measure. ................................................................ 138
Table 4.15: Results for Risk Governance Structure, Risk Governance Effectiveness and
Bank Risk Management. .................................................................................................... 143
Table 4.16: Robustness Test Results for Risk Governance Structure, Risk Governance
Effectiveness and Bank Risk Management. ...................................................................... 146
Table 5.1: Summary of Research Question 1 .................................................................... 151
Table 5.2: Summary of Research Question 2 .................................................................... 153
Table 5.3: Summary of Research Question 3 .................................................................... 155


xii

LIST OF FIGURES
Figure 1.1: Average risk and risk governance effectiveness of banks by year ...................... 6
Figure 1.2: Average risk and risk governance effectiveness of banks by country ................ 6
Figure 1.3: Summary of the literature review of the three research questions .................... 15

Figure 1.4: General objectives of the thesis ......................................................................... 16
Figure 2.1: Corporate governance framework. .................................................................... 29


xiii

ABSTRACT
This thesis examines the determinants of bank risk governance structure, and
the impact of risk governance structure and risk governance effectiveness on bank
risk-taking behavior, as well as the impact of risk governance structure and risk
governance effectiveness on risk management effectiveness. In the context of
regulators around the world trying to provide guidelines for banks to make
corporate governance of banks more effective after the 2008 financial crisis, the
study of bank risk governance structure and its effectiveness has become
increasingly important. By using a sample of 104 commercial banks in ASEAN
countries over 2002-2019 and applying empirical analysis techniques such as
FE/RE, Logit, 2SLS, and GMM, this study provides some important findings.
First, regarding bank risk governance structure determinants, this thesis finds
that risk governance structure (including audit committee size, audit committee
independence, financial and accounting experts on the audit committee, audit
committee meeting frequency, risk committee existence, and external audit quality)
relates positively to a bank‘s scope of operation and monitoring benefit, but
negatively to monitoring cost and CEO‘s negotiation power .
Second, regarding the impact of bank risk governance structure and risk
governance effectiveness on risk-taking behavior, this thesis finds that risk
governance structure significantly affects bank risk-taking behavior (measured by
insolvency risk, credit risk and operational risk). We also find that the role of risk
governance remains unchanged following the 2008 financial crisis and that the
relationship between risk governance effectiveness and risk-taking behavior
depends on a country‘s institutional quality.

Finally, regarding the impact of bank risk governance structure and risk
governance effectiveness on risk management effectiveness, this thesis reveals that
risk governance structure and its effectiveness are positively associated with risk
management effectiveness.


xiv

This study contributes to the existing corporate governance of bank literature by
providing evidence that risk governance structure and its effectiveness play an
important role in constraining risk-taking and in enhancing risk management
effectiveness. The findings of this thesis offer some useful implications for bank
regulators, shareholders, and creditors. Regulators can establish guidelines related
to risk governance to manage risk-taking activities and maintain bank stability.
Bank shareholders can require banks to restructure their risk governance structure to
reduce agency problems relating to risk-taking. Finally, creditors can consider bank
risk governance structure as an important factor when considering extending funds
to particular banks.

Key words: risk governance structure, risk governance effectiveness, risktaking behavior, risk management effectiveness, ASEAN countries.


xv

TÓM TẮT
Luận án này nghiên cứu các yếu tố tác động đến cấu trúc quản trị liên quan đến
giảm sát rủi ro ngân hàng, tác động của cấu trúc quản trị, hiệu quả cơ chế quản trị
rủi ro đến hành vi chấp nhận rủi ro của ngân hàng và tác động của cơ cấu quản trị
rủi ro, hiệu quả cơ chế quản trị rủi ro đến hiệu quả quản trị rủi ro. Trong bối cảnh
các cơ quan quản lý trên thế giới nói chung đang cố gắng đưa ra các hướng dẫn cho

các ngân hàng nhằm cải thiện cơ chế quản trị rủi ro của các ngân hàng để đảm bảo
hoạt động hiệu quả hơn sau cuộc khủng hoảng tài chính 2008, thì việc nghiên cứu
về cấu trúc quản trị liên quan đến giảm sát rủi ro ngân hàng và tính hiệu quả của nó
ngày càng trở nên quan trọng. Bằng cách sử dụng mẫu 104 ngân hàng thương mại ở
các nước ASEAN trong giai đoạn 2002-2019 cũng như áp dụng một số kỹ thuật
phân tích thực nghiệm, như FE / RE, Logit, 2SLS và SGMM, nghiên cứu này cung
cấp một số phát hiện quan trọng.
Đầu tiên, liên quan đến các yếu tố ảnh hưởng đến cơ cấu quản trị rủi ro ngân
hàng, luận án này nhận thấy rằng cơ cấu quản trị rủi ro (bao gồm quy mô ban kiểm
sốt, tính độc lập của ban kiểm sốt, tỷ lệ chun gia tài chính và kế tốn trong ban
kiểm sốt, tần suất họp ban kiểm toán, sự tồn tại của ủy ban rủi ro và chất lượng
kiểm toán độc lập) tương quan dương với phạm vi hoạt động của ngân hàng và lợi
ích giám sát, nhưng tương quan âm đến chi phí giám sát và sức mạnh thương lượng
của CEO.
Thứ hai, về tác động của cơ cấu quản trị rủi ro ngân hàng, hiệu quả quản trị rủi
ro đến hành vi chấp nhận rủi ro, luận án nhận thấy cơ cấu quản trị rủi ro ảnh hưởng
đáng kể đến hành vi chấp nhận rủi ro của ngân hàng (được đo lường bằng rủi ro
thanh khoản, rủi ro tín dụng và rủi ro hoạt động). Chúng tôi cũng nhận thấy rằng vai
trị của quản trị rủi ro vẫn khơng thay đổi sau cuộc khủng hoảng tài chính 2008 và
mối quan hệ giữa hiệu quả cơ chế quản trị rủi ro và hành vi chấp nhận rủi ro phụ
thuộc vào chất lượng thể chế của quốc gia.


xvi

Cuối cùng, về tác động của cơ cấu quản trị rủi ro ngân hàng và hiệu quả của cơ
chế này đến hiệu quả quản trị rủi ro, luận án này cho thấy rằng cơ cấu quản trị rủi ro
và hiệu quả của nó có tương quan dương với hiệu quả quản trị rủi ro.
Nghiên cứu này đóng góp vào các nghiên cứu trước đây về cơ chế quản trị rủi
ro của các ngân hàng bằng cách cung cấp bằng chứng cho thấy cấu trúc quản trị rủi

ro và tính hiệu quả của nó đóng một vai trị quan trọng trong việc hạn chế chấp nhận
rủi ro cũng như nâng cao hiệu quả quản lý rủi ro. Kết quả của luận án này cung cấp
một số ý nghĩa hữu ích cho các cơ quan quản lý ngân hàng, cổ đông và người gởi
tiền. Các cơ quan quản lý có thể thiết lập các hướng dẫn liên quan đến quản trị rủi
ro để quản lý các hoạt động chấp nhận rủi ro và duy trì sự ổn định của ngân hàng.
Các cổ đơng ngân hàng có thể u cầu ngân hàng tái cấu trúc cơ cấu quản trị rủi ro
để giảm vấn đề đại diện liên quan đến việc chấp nhận rủi ro. Cuối cùng, các chủ nợ
có thể coi cấu trúc quản trị rủi ro ngân hàng là một yếu tố quan trọng khi xem xét
việc cho vay ở các ngân hàng cụ thể.

Từ khóa: cấu trúc quản trị rủi ro, hiệu quả cơ chế quản trị rủi ro, hành vi chấp
nhận rủi ro, hiểu quả quản trị rủi ro, các quốc gia Đông Nam Á.


1

CHAPTER 1: INTRODUCTION
1.1 Introduction
While the determinants of corporate governance structure in the banking sector,
as well as the relationship between corporate governance structure and bank risktaking behavior, have been discussed widely, empirical explorations of this field are
scant. This thesis analyzes the bank risk governance structure1 (defined as corporate
governance related to risk management and its role in the oversight of risk-taking
behaviors and risk management) and its effectiveness, as well as investigates
whether it affect bank risk-taking behavior and risk management effectiveness. Risk
management encompasses activities engaged in to ensure the effectiveness of taking
risk2. The sweeping corporate governance of banks reforms related to risk
governance following the 2008 financial crisis raised concerns over existing bank
risk governance mechanisms and their effectiveness. Researchers, therefore, are
more interested in bank risk governance. Indeed, the study of bank corporate
governance and risk governance is more and more important because banks are now

more diversified, larger, and more complex organizations.
To that end, evidence is sought on whether bank risk governance structure
evolves in relation to (1) banks‘ ―scope of operation,‖ (2) trade-offs between
monitoring costs and benefits, and (3) the CEOs‘ negotiation power. With few
exceptions, multivariate regression analysis of the six important risk governance
structure variables (audit committee size, audit committee independence, financial
and accounting experts on the audit committee, audit committee meeting frequency,
risk committee existence, and external audit quality) supports the predictions. The
results are robust to different estimation methods.
In relation to bank risk-taking, the study finds that risk governance structure
affects bank risk-taking behavior in different ways. Most risk governance variables
1
2

The term ―risk governance‖ was broadly used in the literature. We discuss more this term in Section 2.2
The term ―risk management‖ was broadly used in the literature. We discuss more this term in Section 2.2


2

are significantly associated with bank risk-taking and provide strong evidence that
corporate governance can help banks constrain bank risk-taking. Audit committee
independence, financial and accounting expertise, audit committee meeting
frequency, stand-alone risk committee, and external audit quality relate negatively
to bank risk-taking, but audit committee size is positively related to risk-taking.
Moreover, risk governance effectiveness, in general, can reduce risk-taking
behavior. These results are also robust by using different estimation methods or
investigating two different periods—before and after the 2008 financial crisis. The
results show that the role of the audit committee, external audit, and risk governance
effectiveness on oversight risk-taking is unchanged following the 2008 financial

crisis. Additionally, we find that the role of risk governance in constraining bank
risk-taking became more effective in countries having high institutional quality.
Regarding bank risk management effectiveness (i.e., the positive relationship
between bank risk and bank performance), evidence is sought on the role of risk
governance structure (except audit committee size) and risk governance
effectiveness in enhancing bank risk management.
This chapter provides an overview of the thesis and includes the following
sections: In Section 1.2, we present the background and motivation of the thesis;
this section will help identify the research objectives and the three related research
questions discussed in Section 1.3. From the research objectives and research
questions set out in Section 1.3, Section 4 summarizes the research methods
employed to achieve the objectives, and Section 1.5 outlines the research limit and
scope. Based on the research objectives, Section 1.6 analyzes the contributions of
the thesis. Finally, Section 1.7 presents the structure of the remaining chapters of
this thesis.
1.2 Background and Motivation
1.2.1 Corporate governance and bank risk in ASEAN
In ASEAN countries, the financial system in these countries is receiving more and
more attention because this is a dynamic financial and economic area and is considered to


3

soon become one of the five most developed financial regions in the world. And because of
higher financial openness, any adverse shock to the banking sector in these countries may
have a contagion effect on other countries (Moudud-Ul-Huq et al., 2018).
In addition, the financial crisis of 1997–1998 experienced by Asian countries,
followed by that of 2008, highlighted the weaknesses of bank risk governance as a major
cause of the failure (Aebi et al., 2012; Erkens et al., 2012; Hopt, 2013). Weakness in bank
risk governance is particularly comprised of the lack of understanding of risk-taking

activities in risk management and boards not paying much attention to their risk
management function (FSB, 2013; OECD, 2015). After the 2008 financial crisis, several
international multilateral bodies such as the ―Basel Committee on Banking Supervision‖
(BCBS), the ―Financial Stability Board‖ (FSB), the ―Organization for Economic Cooperation and Development‖ (OECD), and the International Monetary Fund (IMF)
published a corpus of guidelines and principles to improve the practices in bank risk
governance in particular and in bank corporate governance in general (FSB, 2013; BCBS,
2015; OECD, 2015; IMF, 2009). Although these guidelines and principles have the
common goal of enhancing the effectiveness of bank risk governance, they are not
consistent. For example, BCBS (2015) suggests that the audit committee should ―have a
chair who is independent and is not the chair of the board or of any other committee‖ and
―include members who have experience in audit practices, financial reporting, and
accounting‖, while the FSB (2013) suggests that members be independent and ―include
members who have experience with regard to audit practices and financial literacy at a
financial institution‖. The FSB (2013) also strongly suggests that banks have a stand-alone
risk committee distinct from the audit committee, and BCBS (2015) still insists that the
audit committee play a risk oversight role. These inconsistent guidelines may make it
difficult for banks worldwide to establish appropriate risk governance structures.
Following the 2008 financial crisis, most banks in ASEAN countries started
implementing risk governance practices, but in different ways. Some countries established
or revised guidelines related to governance based on the guidelines of international
multilateral bodies. Singapore and Malaysia, for example, issued "Risk Governance"
guidelines in 2013, Bank Indonesia (Indonesian regulator) issued Circular Letter
No.13/24/DPNP in 2012 which explicitly explains risk governance, and the Bank of


4

Thailand (Thailand regulator) published The Handbook for Directors of Financial
Institutions, explaining in Chapter 4 the role of boards in promoting risk governance.
While Banko Sentral ng Pilipinas (Philippine regulator) adopted guidance relating to risk

governance in August 2017 with the publication of Circular 971, Vietnam‘s corporate
governance code of best practices draws upon the G20/OECD principles of corporate
governance for both financial and non-financial firms. The codes or guidelines related to
risk governance are very different in these countries. For example, the existence of a risk
committee is mandatory in Malaysia, Thailand, Indonesia, Vietnam, Singapore, and the
Philippines, but not in certain other countries. Relating to the audit committee structure, the
Indonesian regulator requires that audit committees consist of at least two independent
members, while Thailand and Malaysian regulators require at least three (Nam & Lum,
2006). All these differences make the risk governance structure of banks in ASEAN
countries different.
Meanwhile, some researchers still consider international guidelines to be general
and incapable of guiding banks in ensuring effective corporate governance (Helleiner,
2010). Walker (2011) argues that continuous improvement in risk management and
strengthened governance can prevent future financial crises. Therefore, many countries,
including those of ASEAN, informed by these international standards, have tried to
establish or to revise their guidelines and regulations in order to enhance bank risk
management, restructure risk governance structures, and maintain bank stability.. Actually,
risk governance of banks is based on these guidelines not only in ASEAN countries but
also in others. However, risk governance structure differs much from bank to bank because
banks apply these guidelines in different ways. Since all countries in the world, and
particularly ASEAN countries, are trying to revise regulations and guidelines to enable
banks to operate more efficiently and stably, it is important to study the determinant of the
risk governance structure of banks.
Regarding risk management activities, regulators within ASEAN offer different
risk management requirements and bank apply them in many different ways. This can lead
to ineffective risk management by banks. First of all, national supervisors in the ASEAN
region typically specify a minimum reserve requirement. The State Bank of Vietnam, Bank
of the Lao PRD, and the National Bank of Cambodia, have mainly used these reserve

5

requirements as a key tool for managing liquidity risk while other countries within ASEAN
go beyond that. As another sample, the period of liquidity risk management reporting is
different among countries. While the Monetary Authority of Singapore and Bank Indonesia
require monthly reporting, Bangko Sentral ng Pilipinas requires annual reporting. Note that
Bank of the Lao PRD, and the National Bank of Cambodia do not set a period of reporting
and leave each individual bank to decide it according to their business profile. In general,
ASEAN countries do not seem to have found a way to control and improve the efficiency
of bank risk management.
Bank risk-taking behavior and risk management are also paid particular attention in
ASEAN countries. Analysts have shown that the impact of the 2008 financial crisis on the
financial and economic systems of the countries of this region was quite small but that it
varied from country to country. For example, Thailand led the pack of negative growth
countries, followed by Malaysia, Brunei, and Singapore. Cambodia experienced almost a
zero-growth situation in 2009, while Vietnam, Indonesia, and Laos were still able to
maintain high rates of growth (Sangsubhan & Basri, 2012). Therefore, whether corporate
governance is a determining factor for the risks and stability of the ASEAN banking
system needs to be further studied. In addition, Nguyen and Vo (2020) find that, during the
period 2007–2014, ―the banking systems in most ASEAN countries were currently going
through major reforms and restructuring, focusing mainly on consolidation and regulatory
strengthening, which consequently affects the corporate governance aspect of banks‖.
Therefore, investigating the effectiveness of bank corporate governance in these countries
is also necessary.
Figure 1.1 presents the average risk, including insolvency risk (Zscore), credit risk
(NPLS), and operational risk (DROA) as well as risk governance effectiveness (RGEI) of
all countries from 2010-20193. The figure shows bank insolvency risk fluctuating with
credit risk and operational risk tending to decrease over the years. In general, the banks in
ASEAN countries tended to reduce credit risk and operational risk while insolvency risk
did not improve much. Furthermore, the restructuring strategy of corporate governance to

reduce risks, as well as the objectives of risk-taking monitoring of ASEAN banks, could
harm these banks because of the risk-return relationship. Therefore, there is a need for an
3

We start at 2010 because certain countries are lacking of data prior to this year.


6

overall study on the impact of corporate governance on not only risk-taking but also risk
management effectiveness in the ASEAN region. Figure 1.2, which presents the average
risk and risk governance effectiveness by country, shows that insolvency risk in some
countries such as Myanmar, Laos, and Cambodia is higher than in other countries.
Thailand, the Philippines, and Malaysia have the highest credit risk, Indonesia, Cambodia,
and Thailand have the highest operational risk. This indicates that the level of risk may not
depend on the financial development of each country. Furthermore, Brunei, Cambodia, and
Vietnam have the highest level of risk governance effectiveness while other countries do
show much difference. Preliminary analysis indicates that differences in regulations and
policy related to corporate governance of banks across countries can lead to differences in
levels of risk and risk management effectiveness of banks in ASEAN countries. Therefore,
a study of corporate governance and bank risk in ASEAN countries will have important
implications for banks in this region in order for them to formulate appropriate policies to
build a stable financial system.

Source: Author’s summary

Figure 1.1: Average risk and risk governance effectiveness of banks by year

Source: Author‘s summary

Figure 1.2: Average risk and risk governance effectiveness of banks by country
1.2.2 Background of literature on corporate governance and bank risk
In general corporate firms, the separation of ownership and control creates a
conflict of interest between managers (agent) and shareholders (principal), which is


7

mentioned in financial theory and is known as the ―Agency Problem‖. The agency
problem implies that a manager might, in the management of a business, make
decisions for their personal benefit rather than for that of shareholders. A ―complete
contract‖4 between owners and managers can be a fundamentally effective solution
to the Agency Problem. However, such a contract can be difficult to obtain due to
reasons such as uncertainty, information asymmetry, and cost consideration (Fama
& Jensen, 1983a; Grossman & Hart, 1983; Furfine, 2001; and Macey & O'hara,
2003). ―Corporate governance‖ refers to a solution that financial researchers put in
place to deal with the problems of incomplete contracts and Agency in modern
corporate governance models. Corporate governance mechanisms similar to those
employed by companies can solve the problems of Agency and incomplete
contracts in commercial banks as well. Additionally, corporate governance was
found to be a mechanism for reducing the moral hazard problem due to asymmetric
information (Bushman et al., 2004). Macey and O'hara (2003) separate corporate
governance into internal and external corporate governance (market controls and the
regulatory system), and both were found to play an important role in the banking
sector. Regulators and shareholders alike attempt to find appropriate corporate
governance structures in order to reduce asymmetric information, enhance bank
performance, and maintain bank stability (Grossman, 1992; Hellmann et al., 2000;
Zhang et al., 2016).
The research on the internal corporate governance structure of firms has some
noteworthy dimensions. First, the corporate governance of firms is related to the

characteristics of those firms. Most prior studies focus on certain aspects of
corporate governance. Boone et al. (2007) investigate the relationship between firm
characteristics and board structure. They find that board size and board
independence increase as they diversify over time and firms grow; board size
reflects a trade-off between firm-specific monitoring costs and benefits, and board
4

―Complete contract‖ is a term that means that the parties signing a contract ensure full disclosure of
information before and after signing the contract consequently guaranteeing the covenant between
shareholders and managers.


8

independence is negatively associated with a manager‘s influence. Linck et al.
(2008a) focus on the board structures of a sample of nearly 7000 firms and find that
board structure depends on firm size as well as costs and benefits of the board of
director‘s monitoring and advising roles. Focusing on other parts of corporate
governance, Klein (2002b) reports a positive relationship between audit committee
independence and a firm‘s growth opportunities. Vafeas (2000) examines the
determinants of compensation committee composition and provides evidence that
compensation committee membership is significantly related to director type, length
of board tenure, and the number of other directorships held. These findings imply
that a firm should have a corporate governance structure suitable to its specific
characteristics. Most previous studies focus on non-financial firms because of their
population, while banks play a more important role in financial systems. Pathan and
Faff (2013) focus on US-bank holding companies and find that costs and benefits of
board monitoring and advising roles could explain bank board structure. Farag et al.
(2018) focus on Islamic banks and provide evidence that, in those cases, both
boards of director and Sharia supervisory board structure were significantly related

to a bank‘s ―scope of operation‖. These findings indicate that corporate governance
in the banking sector is associated with bank characteristics and environment
activities. However, these studies focus only on BOD while other aspects of risk
governance such as audit committee, risk committee, external audit… play a more
and more important role in bank management. Thus, there is no evidence to date on
whether the risk governance of banks is consistent with particular bank
characteristics. This study fills this gap by investigating the determinant of risk
governance in the banking sector. Such analysis is important because if bank risk
governance structure is found to be consistent with bank characteristics, then the
initiation of any uniform risk governance standard could be ―ill-conceived.‖
Second, many studies focus on the main roles of corporate governance that are
intended to reduce the agency problem and asymmetric information and enhance
firm value. Lipton and Lorsch (1992) recommend a ratio of at least two independent


9

directors to each non-independent director and board committees that consist solely
of independent directors, one of whom should be the chair, to enhance firm
performance. Many prior studies agree that board ownership is a good mechanism
to reduce the Agency Problem. Morck et al. (1988) find that firm performance first
rises as ownership increases to 5%, falls as ownership increases to 25%, and then
rises again slightly at higher ownership levels. Consistent with these findings,
Vafeas and Theodorou (1998) provide strong evidence regarding the relationship
between board structure and firm performance. This relationship has also been
demonstrated in developing countries (Khan et al., 2021; Rashid, 2020; Yasser et
al., 2017). Besides board structure, other elements of corporate governance were
found to play an important role in reducing the Agency Problem and incomplete
contracts; for example, Lisic et al. (2019) find that the audit committee has a
significant relation to firm performance in Greece, while Jia and Bradbury (2020)

find that a risk committee can increase firm performance. Most of the studies focus
on non-financial firms due to their worldwide popularity. The corporate governance
of banks has received more attention since the 2008 financial crisis, which
originated from the collapse of the banking system. More and more researchers are
trying to find the appropriate governance for banks in order to reduce the Agency
Problem and incomplete contracts, as well as to enhance bank performance and
maintain bank stability. Financial researchers then provide some evidence regarding
appropriate corporate governance such as internal (Saunders et al., 1990,
Forssbæck, 2011; Houston et al., 2010; Pathan, 2009), external governance
mechanisms (Caprio et al., 2007; Laeven & Levine, 2009) that can ensure that
banks operate efficiently and stably.
Although banks operate in accordance with the general rules of firms, the
problem with poor corporate governance is more serious than that of non-banks, and
bank failures especially have more significant costs because a bank is a special
economic unit and has a special role in financial intermediation, payment systems,
maturity, liquidity, information, and denomination transformation. Additionally,