Officials on boards and the prudential behavior of banks: Evidence from China's city commercial banks

- The paper takes studies of government ownership and banks' behavior to the micro level of boards
- We study how the officials-and-directors (OADs) affects banks' behavior on the supply side
- Banks with OADs exhibit lower prudential behavior
- The higher is administrative rank of OADs, the larger is the effect. And the older is the OADs, the larger is the effect
- Independent directors can weaken OADs' role and female directors can enhance prudential behavior of banks without OADs

From the perspective of officials-and-directors (OADs), who are commonly appointed by the Chinese government to the banks it owns, this paper takes studies of government ownership and banks' behavior to the micro level of boards. We analyze the relationship between the special political connection of the OADs and banks' prudential behavior, using a sample of China's City Commercial Banks during 2006-2010. We further explore the impact of OADs' characteristics and the role of independent directors and female directors. The results indicate that banks with OADs exhibit lower prudential behavior, and the higher is the administrative rank of the OADs, the larger is the effect. And the older is the OADs, the larger is the effect. More importantly, the government ownership of banks does not have a significant and robust influence on their prudential behavior. Meanwhile, independent directors can significantly weaken the effect of the OADs, while female directors can enhance the prudential behavior of banks in the absence of OADs. Finally, our results persist even after controlling for sample selection bias and alternative variable measures. Our research contributes to the practice of improving bank governance and regulating systematic risk.