This paper analyzes the roles of corporate governance in bank defaults during the recent financial
crisis of 2007-2010. Using a data sample of 249 default and 4,021 no default US commercial
banks, we investigate the impact of bank ownership and management structures on the
probability of default. The results show that defaults are strongly influenced by a bank’s
ownership structure: high shareholdings of outside directors and chief officers (managers with a
“chief officer” position, such as the CEO, CFO, etc.) imply a substantially lower probability of
failure. In contrast, high shareholdings of lower-level management, such as vice presidents,
increase default risk significantly. These findings suggest that high stakes in the bank induce
outside directors and upper-level management to control and reduce risk, while greater stakes for
lower-level management seem to induce it to take high risks which may eventually result in bank
default. Some accounting variables, such as capital, earnings, and non-performing loans, also
help predict bank default. However, other potential stability indicators, such as the management
structure of the bank, indicators of market competition, subprime mortgage risks, state economic
conditions, and regulatory influences, do not appear to be decisive factors in predicting bank
default.