Theorising bank governance : the case of Mexico
This is a study of bank governance. The proposed theory stipulates that direction and control is determined by the interaction of the internal and external forces constituting the bank governance system. The internal forces of governance, mainly managers and owners, act on behalf of private interests. The external forces, mainly the market and the regulator, act on behalf of the public interest in a safe and efficient banking system. Post-positivism is the methodological basis of theory construction. Its main elements are: firstly, social phenomena are studied in their socio-economic context, and, secondly, both qualitative and quantitative methods are used in empirical analyses of typical governance events. The study offers an alternative approach to shareholder theory of corporate governance; it offers a more comprehensive explanation of how firms, especially banks, are governed. The theoretical approach (methodology and theory) is used to explain the Mexican banking crisis, treating it as a typical governance event. The main findings of the study are: (i) financial system reforms in Mexico created a new system of bank governance in which the powers of the external forces were weakened, and those of the internal forces were strengthened; (ii) the new system lacked appropriate preventive regulations, thereby making bank owners the main source of systemic risk; (iii) the financial reforms assumed the market would discipline private interests, thereby creating a strong asymmetry in risk sharing between public and private interests; (iv) this asymmetry explains the scale of the banking crisis and the associated level of fiscal cost expended in the rescue of the banks. The study's main theoretical contribution is the systematic integration of regulation, including the legal framework, in the structure of bank governance. The theory provides a basis for a new research agenda on bank governance appropriate for empirical studies of banks in diverse socio-economic contexts.