NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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

Andrew Ellul, Vijay Yerramilli

NBER Working Paper No. 16178
Issued in July 2010
NBER Program(s):   CF

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.

download in pdf format
   (519 K)

email paper

This paper is available as PDF (519 K) or via email.

Acknowledgments

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w16178

Published: Stronger Risk Controls, Lower Risk: Evidence from U.S. Bank Holding Companies, Andrew Ellul, Vijay Yerramilli. in Market Institutions and Financial Market Risk, Carey, Kashyap, Rajan, and Stulz. 2012

Users who downloaded this paper also downloaded these:
Cheng, Hong, and Scheinkman w16176 Yesterday's Heroes: Compensation and Creative Risk-Taking
Chor and Manova w16174 Off the Cliff and Back? Credit Conditions and International Trade during the Global Financial Crisis
Allen, Babus, and Carletti w16177 Financial Connections and Systemic Risk
Beltratti and Stulz w15180 Why Did Some Banks Perform Better During the Credit Crisis? A Cross-Country Study of the Impact of Governance and Regulation
Laeven and Levine w14113 Bank Governance, Regulation, and Risk Taking
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us