Causal Impact of Risk Oversight Functions on Bank Risk: Evidence from a Natural Experiment

Lakshmi Balasubramanyan (), Naveen Daniel, Joseph Haubrich and Lalitha Naveen

No 19-01, Working Papers from Federal Reserve Bank of Cleveland

Abstract: Our goal is to document the causal impact of having a board-level risk committee (RC) and a management-level executive designated as chief risk officer (CRO) on bank risk. The Dodd Frank Act requires bank holding companies with over $10 billion of assets to have an RC, while those with over $50 billion of assets are additionally required to have a CRO to oversee risk management. The innovation that allows us to document a causal impact is our research design. First, we use the passage of the Dodd Frank Act as a natural experiment that forced noncompliant firms to adopt an RC and appoint a CRO. We adopt the difference-in-difference approach to estimate the change in risk following RC and CRO adoption. Second, we use the regression discontinuity approach centered on the $10 billion and $50 billion thresholds whereby firms that were just below the threshold were not required by the law to install an RC and to recruit a CRO, while those just above the thresholds had to comply with the regulation. Our contribution is to document that neither the RC nor the CRO have a causal impact on risk near these thresholds. However, we do find strong evidence of risk reduction following the passage of the law.

Keywords: Risk; Dodd Frank Act; Bank Risk; Risk Committee; Bank Holding Companies; Chief Risk Officer (search for similar items in EconPapers)
JEL-codes: G21 G34 G38 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2019-01-10
New Economics Papers: this item is included in nep-rmg
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedcwq:190100

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DOI: 10.26509/frbc-wp-201901

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