TY - JOUR AU - Ellul,Andrew AU - Yerramilli,Vijay TI - Stronger Risk Controls, Lower Risk: Evidence from U.S. Bank Holding Companies JF - National Bureau of Economic Research Working Paper Series VL - No. 16178 PY - 2010 Y2 - July 2010 UR - http://www.nber.org/papers/w16178 L1 - http://www.nber.org/papers/w16178.pdf N1 - Author contact info: Andrew Ellul Kelley School of Business Finance Department Indiana University 1309 E. Tenth Street Bloomington, IN 47405 Tel: 812/855-2768 E-Mail: anellul@indiana.edu Vijay Yerramilli 334 Melcher Hall Bauer College of Business University of Houston Houston, TX 77204 E-Mail: vyerramilli@bauer.uh.edu M3 - presented at "Market Institutions and Financial Market Risk", June 17-18, 2010 AB - 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. ER -