| dc.description.abstract | Taiwan’s banking sector has faced huge challenges over the past 20 years. A flood of new banks have entered the market, interest rate spreads have fallen from 2.75% in 1992 to 1.22% in 2009 and both price and non-price competition have steadily eroded domestic banks’ profits. In the 1990s, banks sacrificed loan credit quality to book new business, and when the finances of domestic companies soured after the Asian Financial Crisis in 1997, local banks felt the sting, with the sector’s non-performing loan ratio peaking at 7.48% in 2001. Because operating a bank involves more than the singular pursuit of typical corporate goals (such as maximizing shareholder wealth) and requires shouldering the social responsibility of maintaining stable long-term operations, this paper will explore the role corporate governance can play, if any, in helping banks manage non-performing loans and profits in a sustainable way.
This study concentrates on the corporate governance practices of domestic banks from 1996 to 2011, and classifies information into the following three categories based on bank type: 1) publicly listed and non-publicly listed banks; 2) state-run and non-state-run banks; and 3) financial holding company and non-FHC subsidiary banks. Using control variables such as bank size, and treating corporate governance variables as independent variables and return on equity and non-performing loan ratio as dependent variables, this study finds that corporate governance is relatively ineffective in increasing bank shareholder profits but does help reduce NPL ratios. More precisely, when the ratio of pledged shares to shares held by board directors and supervisors is too high, the board is more likely to let profits suffer or allow the bank to shoulder a higher risk of non-performing loans. Reducing the magnitude of divergence between the board’s control rights and voting rights of the controlling shareholder and increasing managers’ shareholdings are clearly effective in reducing the NPL ratio. This study also finds that financial holding companies’ equity in their subsidiary banks needs to be appropriately diluted, so that if controlling shareholders manage the bank poorly, the next largest shareholder can serve as a check and balance or even take control of the company. | en_US |