The impact of corporate governance and political connectedness on the financial performance of lebanese banks during the financial crisis of 2019-2021

El-Chaa ani, Hani; Ab aham, Rebecca A icle The impac o co po a e go e nance and poli ical connec edness on he inancial pe o mance o lebanese banks du ing he inancial c isis o 2019-2021 Jou nal o Risk and Financial Managemen P o ided in Coope a ion wi h: MDPI – Mul idisciplina y Digi al Publishing Ins i u e, Basel Sugges ed Ci a ion: El-Chaa ani, Hani; Ab aham, Rebecca (2022) : The impac o co po a e go e nance and poli ical connec edness on he inancial pe o mance o lebanese banks du ing he inancial c isis o 2019-2021, Jou nal o Risk and Financial Managemen , ISSN 1911-8074, MDPI, Basel, Vol. 15, Iss. 5, pp. 1-18, h ps://doi.o g/10.3390/j m15050203 This Ve sion is a ailable a : h ps://hdl.handle.ne /10419/274725 S anda d-Nu zungsbedingungen: Die Dokumen e au EconS o dü en zu eigenen wissenscha lichen Zwecken und zum P i a geb auch gespeiche und kopie we den. 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The Impac o Co po a e Go e nance and Poli ical Connec edness on he Financial Pe o mance o Lebanese Banks du ing he Financial C isis o 2019–2021. Jou nal o Risk and Financial Managemen 15: 203. h ps://doi.o g/10.3390/ j m15050203 Academic Edi o s: Shigeyuki Hamo i and S ephen Sa chell Recei ed: 29 Ma ch 2022 Accep ed: 25 Ap il 2022 Published: 28 Ap il 2022 Publishe ’s No e: MDPI s ays neu al wi h ega d o ju isdic ional claims in published maps and ins i u ional a il- ia ions. Copy igh : © 2022 by he au ho s. Licensee MDPI, Basel, Swi ze land. This a icle is an open access a icle dis ibu ed unde he e ms and condi ions o he C ea i e Commons A ibu ion (CC BY) license (h ps:// c ea i ecommons.o g/licenses/by/ 4.0/). Jou nal o Risk and Financial Managemen A icle The Impac o Co po a e Go e nance and Poli ical Connec edness on he Financial Pe o mance o Lebanese Banks du ing he Financial C isis o 2019–2021 Hani El-Chaa ani 1and Rebecca Ab aham 2,* 1School o Business Adminis a ion, Bei u A ab Uni e si y T ipoli Campus, P.O. Box 115020, Co niche El Mina, Riad El Solh, Bei u 11072809, Lebanon; [email p o ec ed] 2Depa men o Finance and Economics, Huizenga College o Business, No a Sou heas e n Uni e si y, 3301 College A enue, Fo Laude dale, FL 33314, USA *Co espondence: [email p o ec ed] Abs ac : The Lebanese banking sec o has become isky due o poli ical and economic c ises. A such imes, co po a e go e nance mechanisms ensu e objec i i y o assessmen and a ionali y in decision making. We examine he impac o in e nal co po a e go e nance mechanisms on he pe o mance o Lebanese banks, wi h poli ical in ol emen in he adminis a ion and owne ship o he banks. We used linea eg ession on a sample o 194 bank-yea obse a ions om 2016 o 2021. The p esence o independen membe s on boa ds o di ec o s, and owne ship concen a ion due o amily owne ship, had posi i e e ec s on bank e u n on asse s, e u n on equi y, liquidi y le els, and loans issued. E icien con ol, along wi h he p esence o audi , and compliance commi ees educed isk by inc easing capi al adequacy and educing non-pe o ming loans. Bo h adminis a i e poli ical connec ions and owne ship poli ical connec ions inc eased e u n on asse s, inc eased e u n on equi y, inc eased liquidi y le els, and inc eased loans o deposi s, while inc easing non-pe o ming loans. Agency con lic s sugges ha g an ing loans due o poli ical p essu e inc eased non-pe o ming loans. Keywo ds: co po a e go e nance; poli ical in e en ion; bank pe o mance; agency con lic s 1. In oduc ion Despi e he inancial dis ess and ins abili y o he in e na ional inancial c isis o 2007, ollowed by poli ical ins abili y in he Middle Eas and No h A ica (MENA) egion, such as du ing he A ab Sp ing, by Decembe 2010, Lebanese banks we e cha ac e ized by a high le el o inancial s abili y, and supe io pe o mance. Speci ically, Lebanese banks had he highes le el o liquidi y in he MENA egion (El-Chaa ani 2019). Solid balance shee s uc u e and high g ow h o banks (El-Chaa ani and El-Abaid 2019), along wi h banking sec ecy and banking egula ions en o ced by he Lebanese Cen al Bank, bols e ed he con idence o in e na ional deposi o s and in es o s in Lebanon as a sa e eposi o y o unds. The ajec o y o inc easingly posi i e bank pe o mance e e sed in Augus 2019. This was pa ly due o COVID-19 lockdowns es ic ing business ac i i y. Businesses de aul ed on loans, while pos poning capi al imp o emen s, he eby educing bo owing. In es o s led o he sa e y o o eign secu i ies and go e nmen deb (P iem 2021;El- Chaa ani e al. 2022a). In Ma ch 2020, he Lebanese go e nmen announced i s i s de aul by decla ing i s inabili y o se ice a USD 1.2 billion deb paymen . To p ese e liquidi y, Lebanese banks began es ic ing cash wi hd awals in he Lebanese li a, while p ohibi ing wi hd awals in he US dolla . The In e na ional Mone a y Fund (IMF) and o eign dono s e used o inance new public deb . The Co up ion Pe cep ion Index classi ied Lebanon in he ed zone (highly co up ed coun y). S anda d and Poo ’s and Fi ch and Moody’s ga e Lebanon a CCC a ing. S anda d and Poo ’s also classi ied many Lebanese banks J. Risk Financial Manag. 2022,15, 203. h ps://doi.o g/10.3390/j m15050203 h ps://www.mdpi.com/jou nal/j m J. Risk Financial Manag. 2022,15, 203 2 o 18 in selec i e de aul s a us due o hei unde pe o mance, high c edi isk, and excessi e liquidi y isk (El-Chaa ani e al. 2022a). Du ing liquidi y c ises, i is essen ial ha bank managemen display impa iali y in loan assessmen , seeking ou al e na i e sou ces o e enue, as e enue sou ces a e los due o economic condi ions. Banks should p e en deposi d ains, while implemen ing measu es o educe isk. In essence, c ea i e decision making and a ionali y in loan assessmen a e needed. E ec i e co po a e go e nance can assis in achie ing hese ou - comes. Independen di ec o s, along wi h an e icien audi commi ee, an e ec i e isk managemen commi ee, and an e ec i e compliance commi ee, can ensu e objec i i y in he assessmen o managemen . Such assessmen may lead o he hi ing o indi idu- als commi ed o c ea i e decision making and a ionali y in loan assessmen which, in u n, inc ease bank p o i abili y and liquidi y, while educing isk. Mul iple s udies ha e p o ided suppo o his hesis. Lloyd (2009) and Ki kpa ick (2009) obse ed ha he in e na ional inancial c isis o 2007 was he esul o ailed co po a e go e nance in he US banking sec o . Hop (2013) e ealed he impo ance o co po a e go e nance in p o ec ing he in e es s o sha eholde s and deposi o s du ing a c isis. The e is a pauci y o esea ch on he e ec o co po a e go e nance mechanisms on he pe o mance o Lebanese banks du ing he inancial c isis. The only o he con empo a y s udy (El-Chaa ani e al. 2022b) ocused on he COVID-19 lockdown pe iod, wi h a sample ha includes banks in o he MENA coun ies, so i does no add ess he Lebanese c isis di ec ly. A sea ch on co po a e go e nance in Lebanese banks yielded a single s udy, ha o Kchou i (2016), which used 18 co po a e go e nance a ibu es o e alua e he usage o co po a e go e nance in Lebanese banks om 2011–2015. Resul s we e inconclusi e, as he co po a e go e nance sys em had weak legal p o ec ion and lack o anspa ency. Kchou i (2016) concluded ha he e was no empi ical e idence ha co po a e go e nance in luenced bank pe o mance among Lebanese banks. The i s objec i e o his s udy is o close he esea ch gap o he lack o empi ical indings o he impac o co po a e go e nance mechanisms on bank pe o mance. In addi ion, we cap u e co po a e go e nance e ec s du ing he inancial c isis—a hi he o unexplo ed pe iod. We add ess a second esea ch gap, i.e., he in luence o poli ically connec ed indi- iduals on bank pe o mance. The cu en knowledge o such connec ions is con ined o anecdo es, wi h lack o empi ical e idence o he impac o such ela ionships on bank pe o mance. A alah and Tamo (2021) p o ide anecdo al e idence o connec ions be ween Lebanese poli icians and banks. In one case, 54% o a bank was owned by wo membe s o a amily, while a hi d membe , who was a o me inance minis e , became Boa d Chai . A high ne wo h poli ician was o e ed a luc a i e in e es a e in excess o 30% on deposi s. Two o me go e nmen minis e s ha e become majo i y bank sha eholde s, while h ee o he s we e independen di ec o s on he boa ds o banks. We measu e poli ical connec - edness in wo dimensions. The i s one is adminis a i e connec ions wi hin banks wi h poli icians, while he second one is he owne ship o banks by poli icians. We conjec u e ha bank p o i abili y, bank liquidi y, and bank isk may be a ec ed by such poli ical connec ions. Bo h posi i e and nega i e e ec s may occu . Connec ions wi h poli icians may inc ease bank p o i abili y, due o he abili y o poli icians o di ec unds o he banks in which hey ha e owne ship. Con e sely, banks may be cons ained o o e loans o less c edi wo hy applican s who a e connec ed o poli icians. We ad ance knowledge o bank pe o mance du ing an economic c isis, by measu ing bank pe o mance comp ehensi ely, in e ms o p o i abili y, liquidi y, and isk. This is signi ican , as inc eased p o i abili y can mask liquidi y p oblems, wi h inc eases in isk. Du ing c ises, loan de aul s and deposi d ains occu . Loan de aul s inc ease isk, while deposi d ains educe liquidi y. J. Risk Financial Manag. 2022,15, 203 3 o 18 2. Li e a u e Re iew 2.1. Hypo heses and Concep ual Model De elopmen Lebanese banks may display elemen s o agency con lic s, en enchmen heo y, and ailed s akeholde heo y. The dema ca ion be ween con ol and owne ship esul s in a high le el o con lic be ween he owne (p incipal) and manage (agen ), due o di e gen p io i ies (Be le and Means 1932). Jensen and Meckling (1976) posi ed ha manage s a e willing o emba k on a g ow h s a egy by inc easing isk, bu sha eholde s wish o minimize isk o p o ec hei s ock om declining in alue. In he case o he banking sec o , agency p oblems exis be ween sha eholde s and bank manage s (Gi o i and Sal adè2021). Gi o i and Sal adè(2021) p oxied agency con lic s in banks by gi ing inside s p e e ences in ob aining loans. Al e na i ely, manage s o banks may ake isky decisions o inc ease hei p i a e bene i s. En enchmen heo y se s o h ha manage s use in o ma ion asymme y o make in es men decisions ha make hemsel es i eplaceable (Hodgson 2005). Du ing he Lebanese economic c isis, manage s exhibi ed in o ma ion asymme y as hey a e p i ileged o see loan de aul s om longs anding cus ome s and deposi d ains om deposi o s who a e dissa is ied wi h hai cu sa ings a es, bo h o which educe bank liquidi y. They see he decline in accoun balances o business cus ome s du ing a ecession. They know o he high in e es payou s on deposi s o poli ically connec ed pe sons in conjunc ion wi h limi ed in e es income om public bond in es men s. Thus, manage s ha e exclusi e access o he de ails o inc easing bank isk and d ain on liquidi y. Acco ding o en enchmen heo y, manage s may ac de ensi ely, by o e ing incen i es o exis ing deposi o s o main ain accoun s wi h he bank, o al e ing loan e ms o p e en de aul s on loans. They may o ego he highe e u ns om seeking al e na i e sou ces o income h ough loan commi men s, in es men s in de i a i es, o o eign secu i ies. S akeholde heo y balances he needs o all o a i m’s s akeholde s. Bank s akeholde s include deposi o s, bo owe s, manage s, employees, poli icians, and egula o s. Du ing c ises, i is challenging o balance he needs o all s akeholde s. Con lic s a ise be ween deposi o s who wan high sa ings a es, bo owe s who wan easie loan e ms, manage s and employees who desi e job secu i y, and egula o s who e alua e banks in e ms o p o i abili y. Recen esea ch pape s (Manning e al. 2019;Lăză oiu e al. 2020;May e al. 2021) e ealed ha o enhance he pe o mance o ins i u ions, manage s should in eg a e co po a e go e nance sys ems ha gene a e unambiguous, meaning ul, and esponsible s akeholde in e ac ions. El-Chaa ani e al. (2022a), e ealed ha an e icien co po a e go e nance sys em imp o ed he pe o mance o he Lebanese banking sec o . Independen membe s, elimina- ion o CEO duali y, and concen a ion o owne ship s uc u e had a posi i e impac on he inancial pe o mance o Lebanese banks. Howe e , El-Kassa e al. (2018) e ealed ha he boa ds o di ec o s o Lebanese banks do no ollow in e na ional s anda ds ega ding disclosu e. In addi ion, hey did no obse e any co ela ion be ween ac ions by he boa d o di ec o s and bank pe o mance. Thus, he impo ance o his esea ch is o shed ligh on he ole o co po a e go e nance mechanisms on he pe o mance o he banking sec o du ing a e y c i ical pe iod cha ac e ized by he exis ence o he Lebanese economic c isis and COVID-19. A g owing body o esea ch s udies has add essed he inancial impac o poli ical connec ions wi h banks (B aham e al. 2020;Ca e a e al. 2012;Dinc 2005; Igan e al. 2012). They e ealed ha poli icians use hei connec ions wi h banks o achie e hei inancial and poli ical objec i es when he e is a weak le el o legal p o ec ion. Fo example, poli icians can encou age s a e-owned banks o be engaged in a isky lending s a egy o deli e e idence ha hei p esence is associa ed wi h a high e u n le el du ing he elec ion pe iod (Dinc 2005). They can use hei p esence on he boa d o di ec o s o de elop poli ical powe (Ca e a e al. 2012) and own sel -in e es (B aham e al. 2020). The e o e, we include wo measu es o poli ical connec edness. They a e (1) adminis a- i e poli ical connec edness, o s a wi h adminis a i e poli ical connec ions, along wi h (2) owne ship poli ical connec edness, o owne ship o banks by poli icians. J. Risk Financial Manag. 2022,15, 203 4 o 18 2.2. Hypo heses Pe aining o Boa d Cha ac e is ics The boa d o di ec o s is he op go e ning g oup o he bank ha nomina es op managemen . The boa d o di ec o s is he sole body wi h he powe o e mina e he employmen o he CEO and he es o he op managemen eam. Independen Membe s Fama and Jensen (1983) main ain ha independen di ec o s bene i i ms by p o- iding moni o ing o managemen , as hey a e upholde s o he sha eholde s’ in e es s. Independen di ec o s conduc igo ous assessmen s o managemen o main ain hei epu a ions o being a ional and impa ial. Independen di ec o s ha e been ound o disclose co po a e social esponsibili y, inc easing goodwill, and in u n, i m pe o mance (T an 2021). They may dismiss unde pe o ming CEOs, whose u no e inc eases wi h he p esence o ou side di ec o s (Weisbach 1988). I ollows ha he exis ence o independen s has a posi i e impac on bank e iciency. Banks a e le e aged en i ies, who de i e e enue om illiquid long- e m asse s, such as mo gages, o be unded by liquid sho - e m de- posi s. E idence om p io s udies has con i med he posi i e impac o he p esence o independen membe s on he pe o mance o he banking sec o (El-Chaa ani e al. 2022b; Fe nandes and Fich 2013). Du ing inancial c ises, de aul s on long- e m asse s p oli e a e, along wi h d ains on sho - e m deposi s, so manage s ha e o o e high in e es a es o e ain deposi o s. Re enue declines, while expenses inc ease. Independen s may be able o sugges no el solu ions o hese issues, and ewa d manage s, who de elop hei own al e na i e e enue s eams. Thus, independen di ec o s can inc ease e enue, and in u n, ne income. Inc eases in ne income esul in highe e u n on asse s, highe e u n on equi y, and g ea e liquidi y. To he ex en ha independen di ec o s con ol managemen ’s p ocli i y o g an loans o less c edi wo hy applican s, o boos loan in- e es income, independen di ec o s may educe bank isk by educing he numbe o non-pe o ming loans. Hypo hesis 1 (H1). Independen di ec o s may inc ease bank e u n on asse s, inc ease e u n on equi y, and imp o e he liquidi y le el, while educing isk h ough he educ ion in non-pe o ming loans o Lebanese banks. 2.3. Owne ship S uc u e I he owne ship o a bank is la gely sepa a ed om managemen , and owned by a big numbe o sha eholde s, he isk o en enchmen and exp op ia ion is e y high. P ac ically, owne ship s uc u e can be analyzed based on he le el o owne ship concen a ion and he iden i y o i s owne . 2.3.1. Le el o Owne ship Concen a ion Manage s may choose in es men s wi h high isk, which p omise high e u ns, as hey a e e alua ed on he basis o achie ing ce ain e u n benchma ks. Such ac ion c ea es agency cos s, wi h sha eholde s who ea loss o capi al om hese isky in es men s. I la ge sha eholde s domina e bank owne ship, hey may ake ac ion by gi ing nega i e e alua ions o managemen , he eby becoming con olle s o agency cos s. Soana e al. (2021) demons a ed ha banks wi h concen a ed owne ship o la ge sha eholde s ha e high p o i abili y in he sho - e m, and educed isk in he long- e m. El-Chaa ani (2014) ound a posi i e associa ion be ween he le el o owne ship concen a ion and inancial p o i abili y o he la ges 20 banks in Lebanon, du ing he 2006–2010 pe iod, p eceding his s udy. I ollows ha he domina ion o la ge sha eholde s can esul in highe e u n on asse s, o e u n on equi y, wi h educ ion in isk, in he o m o educing he numbe o non-pe o ming loans. Hypo hesis 2 (H2). The p esence o a high le el o owne ship concen a ion may inc ease e u n on asse s and inc ease e u n on equi y, while educing he numbe o non-pe o ming loans. J. Risk Financial Manag. 2022,15, 203 5 o 18 2.3.2. Type o Owne ship The second ac o ela ed o owne ship s uc u e is he na u e o he owne . Banks wi h di e en ypes o owne s, and he same deg ee o owne ship concen a ion, may pe o m di e en ly om one ano he . Teka el and Nu ebo (2019) ound ha in E hiopia, s a e-owned banks had lowe e u n on asse s and ne in e es ma gin han p i a e banks. As Lebanon has weak legal p o ec ions ha p e en deposi o s om ob aining ed ess due o loss o unds om manage ial mismanagemen , go e nmen -owned banks a e likely o ha e poo pe o mance. Family owne ship may bene i bank pe o mance. In Lebanon, amily membe s seek o p o ec hei inhe i ance om cu ency de alua ions and bank liquidi y c ises. In he con ex o he c isis pe iod, he conse a i e beha io o amily membe s owa d isk can p o ec he bank om inancial dis ess (Ong and Gan 2013). They may de e managemen om in es ing in nega i e NPV p ojec s, discou age hem om lending o isky bo owe s, o paying excessi ely high in e es a es o e ain exis ing deposi o s. The exis ence o amily membe s is nega i ely associa ed wi h agency cos s, as amily membe s a e usually suppo i e o ewa ding dedica ed and commi ed manage s. As p ese a ion o capi al is he goal o amily membe s, amily owne ship may be expec ed o educe expenses, boos e enue, and inc ease cash lows. The e o e, amily owne ship may inc ease e u n on asse s and inc ease e u n on equi y, bo h o which depend on inc eased e enue. The educ ion in isky loans may educe he size o he loan po olio. Hypo hesis 3 (H3). The p esence o high amily owne ship concen a ion may inc ease e u n on asse s, inc ease e u n on equi y, imp o e liquidi y le els, and con ac he loan po olio o isky loans. 2.4. In e nal Go e nance Tools 2.4.1. In e nal Audi The in e nal audi p o ides independen assu ance o banks on he pe o mance o he in e nal con ol sys em, isk managemen s a egy, and go e nance mechanisms. The in e nal audi commi ee should ha e a high le el o independence. Thus, in e nal audi esul s should be epo ed o he boa d o di ec o s wi hou any il e ing om execu i e manage s. To be e icien , he in e nal audi commi ee mus ha e uncondi ional access o any physical p ope ies, managemen in o ma ion sys ems, eco ds, and da a o he bank. Fu he mo e, he commi ee should include many membe s wi h ad anced expe ience in inance and accoun ing. Du ing a inancial c isis, banks a e unde p essu e o p o e inancial iabili y. To show quick gains in an en i onmen o deposi d ains and loan de aul s, managemen may accep less c edi wo hy loan applican s. This measu e is inhe en ly isky, as i inc eases he numbe o non-pe o ming loans. An audi can e eal such ac ion, sugges ing ha an audi commi ee is capable o isk educ ion, by educing he numbe o non-pe o ming loans. Empi ically, La asa i e al. (2019) obse ed ha independen audi commi ees objec i ely assessed isk, based on he ecommenda ions o he isk managemen commi ee, by demanding highe audi quali y. Hypo hesis 4 (H4). The p esence o an e icien in e nal audi commi ee educes he numbe o non-pe o ming loans a Lebanese banks. 2.4.2. Risk Managemen and Con ol A con agion sp eads isk om he i s bank up bank o o he s. The e o e, banks ha e o be cau ious abou excessi e isk aking. I is cus oma y o banks o appoin a isk managemen commi ee o moni o isk, on an ongoing basis, such as in e alua ing paymen sys ems. E alua ions o paymen sys ems ensu e ha paymen s a e made in he app op ia e amoun s o he igh ecipien s in a imely ashion. Remi ances o unds a e equen ly sen h ough c oss-bo de paymen s om amily membe s in he Uni ed J. Risk Financial Manag. 2022,15, 203 6 o 18 S a es and in Eu ope o ecipien s in Lebanon. I is he esponsibili y o banks o ac as in e media ies in acili a ing such ans e s. Addi ionally, he isk managemen commi ee con ols he isk- aking beha io o managemen , iden i ies eme ging isks, and p oposes di e en s a egies o mi iga e isk. Nume ous s udies ha e shown ha he exis ence o a isk managemen commi ee, e icien isk managemen , and isk con ol p ac ices can inc ease he inancial pe o mance in he banking sec o by educing ope a ional and non-ope a ional cos s (Zul ika e al. 2020). The e o e, by de ini ion, an e ec i e isk managemen commi ee educes bank isk. Such isk may ake he o m o inadequa e capi al ese es o sus ain he bank du ing he inancial c isis, oge he wi h inc eases in non-pe o ming loans om business cus ome s wi h declining sales, o indi idual cus ome s who ha e los employmen . Hypo hesis 5 (H5). The p esence o an e icien isk con ol commi ee inc eases capi al adequacy, while educing he numbe o non-pe o ming loans a Lebanese banks. 2.4.3. Compliance Banks a e hea ily egula ed, in compa ison wi h b oke ages and inance companies. Go e nmen s a e commi ed o p o ec ing he sa e y o deposi s, which depends on he le el o capi al ese es o cushion declines in cash lows. S anda ds o capi al adequacy consis o he minimum le el o capi al ese es o be main ained, i.e., unds ha canno be loaned. Loan loss a ios a e e alua ed, in o de o assess he ex en o non-pe o ming loans. Any deposi insu ance p og am is e alua ed o capi al adequacy, so ha su icien unds a e a ailable o compensa e deposi o s in he e en o insol ency. Hypo hesis 6 (H6). The p esence o an e icien compliance commi ee educes he isk o capi al inadequacy, and educes he numbe o non-pe o ming loans a Lebanese banks. 2.5. Poli ical Connec edness Adminis a i e Poli ical Connec edness: Ce ain indi iduals employed a a Lebanese bank ha e iends o amily membe s who a e poli icians. O he employees a e membe s o uling amilies. In de eloping coun ies, such as Lebanon, poli icians and uling amilies wield conside able in luence. Usually Wes e n-educa ed, hey a e occupied wi h o ging connec ions wi h o he uling amilies who own banks, b oke ages, pha maceu ical companies, eal es a e, ood and be e age p oduce s, o ha e ag icul u al holdings. The o sp ing o ce ain eli e amilies may seek employmen in banks, bo h public and p i a e. They o m he adminis a i ely poli ically connec ed s a a hese ins i u ions. Thei upwa d mobili y h ough he laye s o bank managemen is ensu ed by hei abili y o con ac hei in luen ial amily membe s and poli icians o smoo h app o als o bank- unded p ojec s. Du ing a inancial c isis, hey can be pa icula ly use ul, as hey can p o ide access o eme gency go e nmen unds o inancial ins i u ions, while success ully educing he mos s ingen egula o y equi emen s, due o hei abili y o connec wi h indi iduals a he highes le els o poli ical ins i u ions and bank egula o y ins i u ions (Bussolo e al. 2022). The addi ional unding can inc ease ne income which, in u n, imp o es bank pe o - mance, in e ms o e u n on asse s and e u n on equi y. In lows o unds ha e a di ec posi i e impac on liquidi y and expansion o loans. Reduc ion in egula ion has simila e ec s on income and liquidi y, in ha i educes cos s o compliance. Con e sely, adminis- a i ely poli ically connec ed indi iduals may demand ha loans wi h a o able e ms be gi en o amily and iends. Such loans ha ail o mee he bank’s c edi equi emen s may subsequen ly become bad deb s (P euss and Königsg ube 2021). J. Risk Financial Manag. 2022,15, 203 7 o 18 Hypo hesis 7 (H7). The p esence o s a wi h adminis a i e poli ical connec ions has a posi i e impac on he pe o mance o Lebanese banks in e ms o e u n on asse s o e u n on equi y. Con e sely, adminis a i e poli ical connec edness may inc ease he loan po olio o isky loans (gi en o iends and amily) and he amoun o non-pe o ming loans. Owne ship Poli ical Connec edness: Ano he o m o poli ical connec edness a ises om he owne ship o banks by poli icians. Go e nmen minis e s and high- anking mili a y pe sonnel, upon e i emen , may become p incipal sha eholde s o banks. They demons a e hei con ol o e bank ope a ions by in luencing he membe ship o he boa d o di ec o s. By placing hei associa es on he boa d, hey can be ce ain ha he boa d will adop policies ha a o hei own sel -in e es . Agency con lic s a e minimized, as owne ship concen a ion esul s in a ew poli icians becoming sha eholde s, wi h sha e- holde weal h maximiza ion as he o e iding goal o he i m. Managemen ’s in e es s a e subo dina ed o he in e es s o poli ician-sha eholde s. Boa ds a e likely o a o seeking al e na i e sou ces o income du ing he inancial c isis. Poli icians may be able o hi e expe s o ind such sou ces o income. La ge sha eholde s may in luence he g an ing o loans o iends and amily membe s, he eby inc easing he loan po olio and d aining cash om he bank. To he ex en ha such loans a e alloca ed, wi hou s ingen c edi assessmen s, he p opo ion o bad deb s may inc ease. Hypo hesis 8 (H8). The owne ship o banks by poli icians has a posi i e impac on he pe o mance o Lebanese banks in e ms o e u n on asse s and e u n on equi y. Con e sely, i may inc ease he amoun o non-pe o ming loans. Figu e 1depic s he hypo hesized ela ionships. J. Risk Financial Manag. 2022, 15, x FOR PEER REVIEW 7 o 18 Hypo hesis 7 (H7). The p esence o s a wi h adminis a i e poli ical connec ions has a posi i e impac on he pe o mance o Lebanese banks in e ms o e u n on asse s o e u n on equi y. Con e sely, adminis a i e poli ical connec edness may inc ease he loan po olio o isky loans (gi en o iends and amily) and he amoun o non-pe o ming loans. Owne ship Poli ical Connec edness: Ano he o m o poli ical connec edness a ises om he owne ship o banks by poli icians. Go e nmen minis e s and high- anking mil- i a y pe sonnel, upon e i emen , may become p incipal sha eholde s o banks. They demons a e hei con ol o e bank ope a ions by in luencing he membe ship o he boa d o di ec o s. By placing hei associa es on he boa d, hey can be ce ain ha he boa d will adop policies ha a o hei own sel -in e es . Agency con lic s a e mini- mized, as owne ship concen a ion esul s in a ew poli icians becoming sha eholde s, wi h sha eholde weal h maximiza ion as he o e iding goal o he i m. Managemen ’s in e es s a e subo dina ed o he in e es s o poli ician-sha eholde s. Boa ds a e likely o a o seeking al e na i e sou ces o income du ing he inancial c isis. Poli icians may be able o hi e expe s o ind such sou ces o income. La ge sha eholde s may in luence he g an ing o loans o iends and amily mem- be s, he eby inc easing he loan po olio and d aining cash om he bank. To he ex en ha such loans a e alloca ed, wi hou s ingen c edi assessmen s, he p opo ion o bad deb s may inc ease. Hypo hesis 8 (H8). The owne ship o banks by poli icians has a posi i e impac on he pe o - mance o Lebanese banks in e ms o e u n on asse s and e u n on equi y. Con e sely, i may inc ease he amoun o non-pe o ming loans. Figu e 1 depic s he hypo hesized ela ionships. Figu e 1. Hypo hesized Rela ionships o P edic o s, and C i e ia. 3. Ma e ials and Me hods 3.1. Sample Desc ip ion The main popula ion consis s o 15 Lebanese in es men banks and 50 comme cial banks, as e ie ed om he O bis (2021) da abase. F om he 65 banks, 11 banks we e ex- cluded due o missing da a pe aining o inancial and co po a e go e nance a iables. Fo eign banks we e excluded om he ini ial popula ion. The inal sample includes 45 Figu e 1. Hypo hesized Rela ionships o P edic o s, and C i e ia. 3. Ma e ials and Me hods 3.1. Sample Desc ip ion The main popula ion consis s o 15 Lebanese in es men banks and 50 comme cial banks, as e ie ed om he O bis (2021) da abase. F om he 65 banks, 11 banks we e excluded due o missing da a pe aining o inancial and co po a e go e nance a iables. Fo eign banks we e excluded om he ini ial popula ion. The inal sample includes 45 Lebanese banks and 194 bank-yea obse a ions ex ac ed om 2016–2021. The Lebanese banking c isis began in 2019 bu we belie e ha his c isis had i s oo s se e al yea s p io . J. Risk Financial Manag. 2022,15, 203 8 o 18 The non- inancial and inancial in o ma ion was ex ac ed om di e en da abases such as O bis Bank-Scope (O bis 2021) and he annual epo s o Lebanese banks. The egula o y da a ela ed o he p o ec ion igh s o sha eholde s, deposi o s, and o he ele- an s akeholde s we e ex ac ed om he di e en legal ci cula s issued by he Lebanese Cen al Bank (CBL 2021), he Banking Con ol Commission o Lebanon (BCC 2021), and he Associa ion o Lebanese Banks (ALB 2021). Table 1p o ides a desc ip ion o he sample. Table 1. Sample Desc ip ion. Yea 2016 2017 2018 2019 2020 2021 Numbe o Bank Obse a ions pe Yea 45 45 39 32 17 16 Numbe o Comme cial Banks 39 39 33 27 15 14 Numbe o In es men Banks 6 6 6 5 2 2 The da a in Table 1show ha he numbe o obse a ions was 45 o 2016 and 2017. I declined o 39 and 32 du ing 2018 and 2019, espec i ely. The numbe s o obse a ions du ing 2020 and 2021 we e 17 and 16 banks, espec i ely. 3.2. The Resea ch Model This esea ch s udies he in luence o he independen a iables o co po a e go e - nance and poli ical connec edness on h ee di e en dependen a iables: p o i abili y, liquidi y, and isk managemen . P o i abili y was measu ed by e u n on asse s, along wi h e u n on equi y. Liquidi y was measu ed by liquidi y le el and he loan po olio. Risk was measu ed by capi al adequacy and non-pe o ming loans. Figu e 1diag ams he p oposed ela ionships be ween he p edic o s and he c i e ia. 3.3. Reg ession Equa ions Six OLS eg essions we e pe o med, wi h he ollowing dependen and independen a iables. All eg essions we e ee o he e oskedas ic esiduals and au oco ela ed esidu- als. Reg ession (1) and Reg ession (2) assessed p o i abili y, Reg ession (3) and Reg ession (4) measu ed liquidi y, while Reg ession (5) and Reg ession (6) e alua ed isk. ROA =α +β1BS +β2BI +β3CD +β4OW +β5FAM +β6FOR +β7INST +β8DIR +β9AC +β10RE +β11RO +β12RC +β13APC +β14OPC +β15BSIZ +β16BAGE +ε (1) ROE =α +β1BS +β2BI +β3CD +β4OW +β5FAM +β6FOR +β7INST +β8DIR + β9AC +β10RE +β11RO +β12RC +β13APC +β14OPC +β15BSIZ +β16BAGE +ε(2) LI =α +β1BS +β2BI +β3CD +β4OW +β5FAM +β6FOR +β7INST +β8DIR +β9AC +β10RE +β11RO +β12RC +β13APC +β14OPC +β15BSIZ +β16BAGE +ε(3) LO =α +β1BS +β2BI +β3CD +β4OW +β5FAM +β6FOR +β7INST +β8DIR + β9AC +β10RE +β11RO +β12RC +β13APC +β14OPC +β15BSIZ +β16BAGE +ε(4) NPL =α +β1BS +β2BI +β3CD +β4OW +β5FAM +β6FOR +β7INST +β8DIR + β9AC +β10RE +β11RO +β12RC +β13APC +β14OPC +β15BSIZ +β16BAGE +ε(5) CA =α +β1BS +β2BI +β3CD +β4OW +β5FAM +β6FOR +β7INST +β8DIR + β9AC +β10RE +β11RO +β12RC +β13APC +β14OPC +β15BSIZ +β16BAGE +ε(6) whe e ROA = Re u n on Asse s, Ne Income/To al Asse s, ROE = Re u n on Equi y, Ne Income/To al Equi y, LI = Liquidi y Le el, To al Loans/To al Asse s, LO = Loan Po olio, To al Loans/To al Deposi s, NPL = Non-Pe o ming Loans, Non-Pe o ming Loans/G oss Loans, CA = Capi al Adequacy, (Tie 1 Capi al + Tie 2 Capi al)/(Risk-Weigh ed Exposu e) J. Risk Financial Manag. 2022,15, 203 15 o 18 socia ions, and o he esou ces, managemen may ind echniques o minimize he issuance o isky loans. Risk Con ol Commi ee: The same signi ican and nega i e ela ionship is also de- ec ed be ween he exis ence o e icien isk managemen commi ees and liquidi y a ios. An e icien isk commi ee can mi iga e liquidi y isk by educing expansiona y lending p ac ices. This is a no el inding o his s udy, as we do no ind i s pa allel in he li e a u e. Poli ical Connec edness: Poli ical connec edness esul s in an inc ease in loans, ega d- less o whe he he e is adminis a i e poli ical connec edness, o owne ship o he bank by poli icians. Banks may submi o poli ical p essu e by expanding he numbe o loans o iends and business associa es o poli icians, esul ing in loss o liquidi y, as cash lea es he bank o be disbu sed in he communi y. Agency heo y indica es ha manage s seeking he a o o poli icians may issue hese addi ional loans, which yield p i a e bene i s o he manage s, while educing he bank’s liquidi y. The esul is an applica ion o agency heo y, in which manage s may implemen di e en s a egies o ex ac p i a e bene i s. Nume ous empi ical s udies ound hese mo i a ions o loan expansion by manage s du ing non-c isis pe iods (B aham e al. 2020;Ca e a e al. 2012;Dinc 2005). 5.1.3. Risk Managemen Model 5 inds he exis ence o independen membe s on he boa d o di ec o s is nega i ely and signi ican ly associa ed wi h he pe cen age o non-pe o ming loans. In suppo o agency heo y, he p esence o independen s on boa ds leads banks o be e y selec i e in hei lending s a egy, which can educe he le el o non-pe o ming loans. We add speci ici y o Jensen and Meckling’s (1976) agency heo y, wi h he inding ha independen di ec o s educe isk by educing agency con lic s in g an ing loans, as hese di ec o s p e en managemen om g an ing loans o pe sonal iends and amily membe s, who may be less c edi wo hy. Mo eo e , he esul s in Model 5 iden i y a nega i e and signi ican impac o he e icien audi commi ee and e icien compliance commi ee on he non-pe o ming loans. The exis ence o he abo e commi ees can imp o e he unc ion o c edi isk con ol in Lebanese banks. This inding is consis en wi h ha o La asa i e al. (2019) o audi commi ees and Zul ika e al. (2020) o compliance commi ees du ing non-c isis pe iods. The esul o poli ical connec ion a iables shows ha he implica ion o poli icians in he bank as sha eholde s o execu i e membe s is inc eases in he le el o engagemen in isky lending ac i i ies. Kchou i (2016) ailed o empi ically e i y he in luence o poli ical connec edness on bank pe o mance du ing non-c isis pe iods, while we ound inc eased isk due o adminis a i e poli ical connec edness and owne ship poli ical connec edness. Finally, he esul o Model 6 demons a es ha only he size o banks, besides he exis ence o an e icien isk managemen (RC) commi ees (RO), has a ma ginally posi i e impac on he capi al adequacy a io o Lebanese banks o he pe iod o 2016–2021. We belie e ha his no el inding is due o he ma ginal ole o he Lebanese banking sec o in e ms in in luencing he capi al adequacy le el. The capi al adequacy le el is de e mined by he in e nal egula ion codes issued by he Cen al Bank. 5.2. Theo e ical Implica ions and Implica ions o Lebanese Banking This esea ch has many heo e ical implica ions and deli e s new insigh s o he li e a u e ha s udies he impac o go e nance s uc u es, and poli ical connec edness, on banks’ pe o mance du ing unce ain pe iods. Fi s , he indings o his esea ch a e in line wi h se e al heo ies such as esou ce based and agency heo ies, showing ha in e nal co po a e go e nance mechanisms such as independen membe s, owne ship concen a ion, in e nal audi , compliance, and isk managemen commi ees could lead o mi iga ing he exp op ia ion beha io s and inc easing he inancial pe o mance o he banking sec o . Second, his pape o e s an in-dep h unde s anding o he impac o poli ical connec ion on he inancial beha io and pe o mance o he banking sec o . J. Risk Financial Manag. 2022,15, 203 16 o 18 On he o he hand, his pape could be used by banke s and inancial egula o s o manage banks e icien ly du ing unce ain y and c ises. Fi s , Lebanese banke s mus e iew hei loan policy and liquidi y, and assess he esilience o hese basic pilla s. Second, execu i es in banks mus e iew he disad an ages o hei connec ions wi h poli icians. They mus limi he oles o poli icians in banks o ope a ional ac i i ies. Thi d, Lebanese banks mus e alua e hei inancial s a egies and inancial s uc u es o ensu e hei sus ainabili y du ing unce ain y. Finally, he Lebanese go e nmen and inancial au ho i ies ha e o e iew hei inancial egula ions o enhance he con ol o he banking sec o . 5.3. Manage ial Con ibu ions Fou main co po a e go e nance mechanisms can be implemen ed by Lebanese banks o imp o e inancial pe o mance, educing any po en ial con lic s be ween agen and p incipal. The i s in e nal co po a e go e nance mechanism is he independen membe s. The esul s o his s udy indica e ha he inancial pe o mance o Lebanese banks is posi i ely associa ed wi h he pe cen age o independen membe s on he boa d o di ec o s, which imp o es he abili y o e icien ly deploy esou ces and educe agency con lic s. The second in e nal co po a e go e nance mechanism is owne ship concen a ion. The concen a ion o owne ship by amily and ins i u ional in es o s has a posi i e impac on he p o i abili y and liquidi y o Lebanese banks. Thus, owne ship concen a ion can be used by he bank as a go e nance mechanism o align in e es s be ween execu i es and sha eholde s. The hi d in e nal co po a e go e nance mechanism is he emune a ion o op man- age s. The compensa ion policy can be employed as an al e na i e me hod o mo i a e he CEO owa d he inc easing o bank inancial pe o mance. On he o he hand, he esul does no e eal any impac o emune a ion on liquidi y and isk managemen o Lebanese banks. Thus, he p oblem is ela ed o managemen ’s e o s o imp o e he pe o mance o banks. They can employ high- isk s a egies o de elop bank pe o mance, which can inc ease agency cos s. The exis ence o an e icien isk con ol commi ee educes he le el o liquidi y isk and c edi isk in Lebanese banks. This is he only in e nal commi ee o posi i ely impac capi al adequacy. The exis ence o poli ical connec ions wi h banks led Lebanese banks o be engaged in p ac icing isky and non-pe o ming lending s a egies since 2016 wi hou conside ing in e na ional s anda ds o c edi isk con ol and liquidi y isk managemen . Fo yea s, Lebanese banks ha e been inancing go e nmen deb . Despi e he impo ance o co po a e go e nance a iables and hei impac s on he di e en inancial indica o s o he Lebanese banking sec o , he in e nal and ex e nal go e nance mechanisms in Lebanon a e weak and need o be imp o ed. The weak le el o co po a e go e nance mechanisms and he poli ical connec ions can be conside ed as ac o s ha con ibu ed o he inancial collapse o he Lebanese banking sec o in 2020, and hei imp o emen can os e us owa d he Lebanese banks. Acco ding o his esea ch, he Lebanese banks canno sus ain and ace he inancial c isis wi hou e iewing hei go e nance mechanisms and eexamining he impac o hei connec ion wi h poli icians. They should de elop bank anspa ency and independence, h ough he p esence o independen membe s as execu i es and as membe s o he boa d o di ec o s. On he o he hand, he Lebanese go e nmen in collabo a ion wi h inancial egula o s and he Lebanese Cen al Bank mus ein o ce hei con ol and co po a e go e - nance mechanisms o banks. In addi ion, hey mus p ohibi any suspicious connec ion wi h poli icians ha could lead o damage o he sus ainabili y o banks. Despi e he limi a ions o his s udy (e.g., limi ed pe iod in he analysis, absence o compa ison among coun ies), u u e esea ch is di ec ed o u he e i y he cu en esul s, by in oducing some addi ional a iables in o he analysis. J. Risk Financial Manag. 2022,15, 203 17 o 18 5.4. Resea ch Limi a ions and Fu u e Pe spec i es Despi e he heo e ical and manage ial con ibu ions, his esea ch pape has se e al limi a ions. Fi s , his esea ch ocused on a limi ed pe iod (2016–2021). Second, his esea ch conside ed quan i a i e da a wi hou conside ing quali a i e in o ma ion ela ed o each bank. Thi d, he a iables ela ed o poli ical implica ions in banks’ ac i i ies could be biased by he exis ence o non-obse ed oles o poli icians in he Lebanese banking sec o . Fou h, his esea ch s udied he inancial pe o mance o he Lebanese banking sec o om 2016–2022 which could be biased by he de elopmen o COVID-19 and i s impac on he socioeconomic condi ions. Finally, his esea ch did no conside se e al impo an economic ac o s and o he in e nal ac o s due o lack o in o ma ion. Thus, u u e esea ch can be di ec ed o e i y he esul s by conside ing he eco - e y pe iod om COVID-19 and by in eg a ing addi ional mic oeconomic and mac oeco- nomic a iables. 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