Nexus between Corporate Governance and Bank ‘Risks: Insight from the Commercial Banks in Pakistan

Abstract

Corporate governance and risk management are the essential elements of contemporary business management of commercial banks. This study endeavors to shed light on the influence of the corporate governance framework on the bank’s risk, including credit risk, liquidity risk, and operational risk. We analyzed a sample of Pakistani banks using a two-step System GMM over the period 2009-2020. The estimation results validate that corporate governance indicators have significant impacts on banks’ risk exposure. Board size, board independence, size of the audit committee, and risk management committee are performing vital role in reducing credit, liquidity, and operational risk. However, CEO duality causes an increase in these risks. Moreover, bank size, taxes, and asset structure have positive impacts and cause an increase in credit, liquidity, and operational risk. On the other side, cost-efficient banks are exposed to lower risk. The study's findings recommend that bank management enforce effective corporate governance mechanisms to encounter the risks timely.