1. Background
Corporate governance codes are rules and practices that are put up to control and regulate company activities. The general backbone of the idea of management or leadership system is to balance the interests of the many stakeholders of a company. Banks operate within the set guidelines and regulations in the country. The "weak adopter" is when a country has four entries of corporate guidelines. A "strong adopter” is when a country with more than four entries. The research show or aims at quantifying connection or relationship of the bank’s risk and the current adoption policy of the country. This relationship would be measured using two banks, one from United Kingdom, a strong adopter, and another from Malaysia, a weak adopter. The banks are HSBC Holdings plc Bank and Maybank respectively.
The risk levels of these individual banks make is measured in terms of the risk factors that may potentially cause the inability of the organization to set the debts within the required duration. Insolvency is a scenario where the banks or financial institution are not in a better position to pay off its debts. There are many factors that may eventually result in the realization of insolvency within a given financial institution. They include a low Z score and evidence of unregulated high risk-taking. The study aims at assessing the two banks along the measures of the bank’s closeness to bankruptcy (White, 2014).
The financial institutions have taken the toll of having more government regulations put up against it. The financial sector across Europe is under some regulatory measures influenced by the culture and laws of the host nation. Regulations on banking tend to have two kinds of influence on the overall risk-taking behavior. The first case scenario is when the laws put up in place measures to protect the interests of the investor by ensuring there is investment. In this case, investors are more committed to undertake larger risks to make more profit. The second scenario is when the regulations are set to make the banks dedicate a larger portion of its assets in investments. It implies that the banks would choose to make sound and less risky decisions (Khan, Muttakin & Siddiqui, 2013).
The paper covers both scenarios using the two banks sampled for the study. The first part to be covered will be an analysis of the previous researches on the same subject matter. An excellent literature review forms a basis for the continuation of the study. It outlines the need to carry out such a study. Data and information obtained from both banks through their financial statements and independent information on their socio-political structure will be analyzed to form raw data of the study. A proper conclusion will be reached concern the performance and previous track records of the banks.
2. Review
A thorough review of previous research on the subject issue of the determinants of risk behavior in banks is necessary to acknowledge other contributions in this field of study. The study would help to provide a basis for the study of how the compliance levels with corporate governance regulations affects the risk factor of the both financial institution.
Theoretical Literature
Many factors determine or establish the degree of risk that the organizations are willing to accept to conduct their daily activities the amount of risk that a bank is willing to take. One of which is the type of management incorporated by the institutions. When the administration or operations of the organization are performed by a single decision maker like a bank manager, the risks taken tend to be small and sparse. On the other hand, when the shareholders are the primary decision makers in running the bank, the bank tends to make riskier choices. A single decision maker taking his or her money would tend to be more careful with it in comparison to a high number of investors with diverse portfolios. It is the principle of diluted responsibility, where investors feel safer taking high risks since they won’t bear the price alone (Syed Alwi, Suhaimi & Mohamed Kamil, 2013).
The type of bank partly identifies the level risk the bank would be subjected. State-owned banks are known to issue loans that are termed as high risk compared to privately owned banks. The risk is increased when the stakeholders in the organization is increased. When the management of the financial institution is under a single owner's control or leadership hierarchy, the amount of risks taken is lower than in the banks where there are many stakeholders involved in the decision making process (Klomp & De Haan, 2012).
Empirical Literature
The legal standards and policies set up to protect the specific interests of the investors including security of deposits all play a role in enhancing the banks' ability engage in riskier transactions or businesses. Some countries have put up legislations such as these to protect primarily the interests of investors thereby encouraging more and more investments into the country's financial sector. However, it is crucial to note that the regulation of the organizations has also led to the reduction in cases of banks engaging in riskier activities. In an overly-regulated market, legislations are put up that requires that bank owners put up a stake of their own assets into the investments they make, this, in turn, leads to fewer risks being taken by banks (Martel, van Rixtel & González Mota, 2012).
According to recent research conducted on the factors that influence the level of risk factors that is found because of the state of the individual countries. A country that is politically stable can have a financial sector that takes greater risks in its operations. The cultural and legal aspects of different countries also play a crucial role determining the acceptable risk factor’s levels to be undertaken by the institutions. Favorable political environments increase the chances that an institution will take high risks due to the availability of a reliable structure in place that protects the investments made.
3. Data Analysis
Data was acquired from the financial record of the two banks. That is, Maybank in Malaysia and HSBC Holdings plc bank in United Kingdom. The data used here is from the official websites and annual financial information.
Z- Score
A Z-score refers to the test of the financial health of a company; the valuation is done by taking all the data that is part of the financial records of the company. When there is high Z score it implies that there is a strong financial position hence a lower chance of becoming insolvent. HSBC Holdings plc Bank scored a higher Z-score when compared to Maybank. HSBC Holdings plc is, therefore, the organization is at low risk rate of going bankrupt than Maybank and hence is more financially "healthier."
This high score for a bank in United Kingdom shows that even with minimal regulations and policies, the country's own unique factors such a strong political and economic structure favors the risk taking of the banking system. Malaysia has less stringent regulations in place and so banks can take on more risks resulting in higher returns (Han, Benson, Chen & Zhang, 2012).
Impaired and gross loans
HSBC Holdings plc Bank’s gross and impaired loans are low in ratio. The lower ratio indicates that with minimal regulations and policies in place, the banks in Malaysia take high risks by issuing more loans that have a high possibility of being defaulted. More risk is taken in the loaning out process in less regulated countries.
Country Governance Measures
Every country has their own rankings regarding the involvement of government in creating a stable environment that allows for free and fair trade. United Kingdom, being a "strong adopter" shows a slightly higher index when compared to that of Malaysia. The countries are ranked regarding how the government handles: the rule of law, the effectiveness of the government and the level of corruption
The rule of law entails the level to which the companies and institutions within the company adhere to set standards and regulations for trade. United Kingdom scores highly in this sector. Control of corruption is important in establishing proper trade environment, in this HSBC Holdings plc Bank has an index of 0.13 compared to Maybank's 0.43. Political stability determines whether or not the prevailing political climate has a great effect on the operations of the banks, in this regard, Malaysia scored higher than United Kingdom, justifying the higher Z-score of HSBC Holdings plc Bank (De Nicolò, Gamba, & Lucchetta, 2012).
In conclusion, the risk level of a financial institution defines the particular government policies and regulation that has been adopted by the financial in a given country. The relationship is also influenced by the specific nature of each country including its political stability and cultural practices. A strong adoption policy will reduce the number of risks that a company can make if the policies support the welfare of the shareholders. It should take into consideration the importance of the shareholder’s right in an organization. However, in some cases, regulations that ensure the protection of investments for the stakeholders lead to increased risk-taking behavior.
References
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Klomp, J., & De Haan, J. (2012). Banking risk and regulation: Does one size fit all?. Journal of Banking & Finance, 36(12), 3197-3212.
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