Bank Governance, Risk and Bank Insolvency: Evidence from Tunisian Banks

Abstract

The aim of this paper is twofold. Firstly, it investigates the effect of bank governance on bank risk measured by the standard deviation of the return on assets (SDROA). Secondly, it tests the relationship between bank governance mechanisms and bank insolvency proxied by the Zscore (ROA). To achieve this goal, we used a sample of 11 Tunisian banks observed during the period 2006-2015. These 11 banks are considered as the most dynamic banks in the Tunisian banking system. The econometric approach used in this study is based on panel data analysis especially fixed and random effect models. Empirical results indicate that the presence of Supervisory Committee and monitoring of risks (COR), the executive compensation (REMB) and the board size (BDSIZE) increases significantly Tunisian bank risk and insolvency. However, the presence of independent directors (INDD) and the proportion of institutional investors decrease bank risk and bank insolvency. With regard to the effect on macroeconomic condition, only inflation rate exerts a significant effect. However, this effect is negative when the dependent variable is SDROA and positive for Z-score. The effect of GDPG is not significant for both bank risk and bank stability.