Stronger risk controls, lower risk
Subtitle: evidence from U.S. bank holding companies
By: Andrew Ellul, Vijay Yerramilli
Contributors: Yerramilli, Vijay; National Bureau of Economic Research
Series: NBER working paper series -- working paper 16178; Working paper series (National Bureau of Economic Research : Online) -- working paper no. 16178.
Publisher: National Bureau of Economic Research
Published: 2010
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Description: "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"--National Bureau of Economic Research web site.
Notes: Title from PDF file as viewed on 8/19/2010.

Includes bibliographical references.

Also available in print.

System requirements: Adobe Acrobat Reader.

Mode of access: World Wide Web.