Stronger Risk Controls, Lower Risk: Evidence from U.S. Bank Holding Companies

Andrew Ellul and Vijay Yerramilli

No 16178, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In this paper, we investigate whether U.S. bank holding companies (BHCs) with strong and independent risk management functions have lower enterprise-wide risk. We hand-collect information on the organizational structure of the risk management function at the 74 largest publicly-listed BHCs, and use this information to construct a Risk Management Index (RMI) that measures the strength of organizational risk controls at these institutions. We find that BHCs with a high RMI in the year 2006 (i.e., before the onset of the financial crisis) had lower exposure to private-label mortgage-backed securities, were less active in trading off-balance sheet derivatives, had a smaller fraction of non-performing loans, and had lower downside risk during the crisis years (2007 and 2008). In a panel spanning the 9 year period 2000--2008, we find that BHCs with higher RMIs have lower enterprise-wide risk, after controlling for size, profitability, a variety of risk characteristics, corporate governance, CEO's pay-performance sensitivity, and BHC fixed effects. This result holds even after controlling for any dynamic endogeneity between risk and internal risk controls. Overall, these results suggest that strong internal risk controls are effective in restraining risk-taking behavior at banking institutions.

JEL-codes: G01 G21 G32 (search for similar items in EconPapers)
Date: 2010-07
Note: CF
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (20)

Published as ANDREW ELLUL & VIJAY YERRAMILLI, 2013. "Stronger Risk Controls, Lower Risk: Evidence from U.S. Bank Holding Companies," The Journal of Finance, vol 68(5), pages 1757-1803.

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Working Paper: Stronger Risk Controls, Lower Risk: Evidence from U.S. Bank Holding Companies (2010)
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