Overconfident Bank CEOs: Risk Amplification Amid Economic Uncertainty

Kwabena Aboah Addo, Shams Pathan and Steven Ongena
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Kwabena Aboah Addo: Utrecht University
Shams Pathan: University of Newcastle - Newcastle University Business School

No 24-31, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We examine whether overconfident bank CEOs mitigate or amplify risk amid increasing Economic Policy Uncertainty (EPU). Our findings indicate the latter—a risk-aggressive behavioural response to the rise in credit demand during EPU. Cross-sectional analyses reveal that overconfident CEOs contribute to high loan impairments during high EPU through excessive credit extension and under-provision of loan reserves. Therefore, we identify overconfident CEOs as a transmission channel that propagates a cycle of risky credit extension, which enhances bank performance. Considering our findings, investors, boards, and regulators, while acknowledging the value of overconfident CEOs during EPU, should be mindful of the systemic implications of their policies.

Keywords: Economic Policy Uncertainty; CEO overconfidence; banking risk; bank lending; banking performance. (search for similar items in EconPapers)
JEL-codes: G21 G28 G30 G38 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2024-05
New Economics Papers: this item is included in nep-ban and nep-fdg
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2431

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