Impact of Corporate Governance and ERM on Bank Risk: A US - UK Comparative Analysis

Abstract

Banks play an integral role in the economic growth of nations. However, it is necessary to take into account the modern-day economic shocks while considering the operation and profitability of banks. The United States and the United Kingdom are two such nations that are highly integrated into the global markets but also have substantially unique banking regulations. The establishment of a dynamic corporate governance framework and ERM methodology is critical for banks. In order to compare the impact of ERM and corporate governance framework on the risk of banks, while controlling for economic factors, this paper uses a GMM methodology. A Driscoll–Kraay fixed-effect estimation was also added as an additional robustness check. Data for 10 banks with a market capitalisation greater than 5 million USD has been considered from both nations between 2019 and 2023. The results of the estimation show that governance factors and risk management factors impact the NPL but not the ROA. However, in the UK, both NPL and ROA are impacted. This shows the non-binding risk in USA whereas the core-binding risk in the UK markets. Finally, macroeconomic factors have a significant impact on the risk of banks across both nations. Based on the research, the binding versus non-binding risk distinction identified here offers a conceptual framework for evaluating governance and ERM effectiveness in other banking systems.