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Regulatory and governance impacts on bank risk-taking

Karen Schnatterly (), Brent B. Clark (), John Howe () and Michael L. DeVaughn ()
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Karen Schnatterly: University of Missouri
Brent B. Clark: University of Nebraska Omaha
John Howe: University of Missouri
Michael L. DeVaughn: University of St. Thomas

Risk Management, 2019, vol. 21, issue 2, 99-122

Abstract: Abstract Risk in financial institutions is vitally important to regulators, policy makers, investors, and the stability of the financial system, yet some critical aspects of that risk remain poorly understood. In the case of U.S. startup banks, a critical choice that can influence risk-taking behavior is which of three regulators—with varying levels of stringency—to choose. The board of directors of the new bank makes this important decision, which may result in different risk implications, depending on board’s structure. Here, we examine banks’ risk behavior associated with the degree of board independence and the choice of regulator. We find that the regulatory environment and board independence jointly influence new bank risk. Our evidence suggests that the intensity of regulatory scrutiny is a partial substitute for board independence in achieving an optimal level of risk. We discuss the implications of our findings for theory and policy.

Keywords: Banking; Boards of directors; Corporate governance; Regulation (search for similar items in EconPapers)
Date: 2019
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