Why do Bank Boards have Risk Committees?
We develop a theory of bank board risk committees. With this theory, such committees are valuable even though there is no expectation that bank risk is lower if the bank has a well-functioning risk committee. As predicted by our theory (1) many large and complex banks voluntarily chose to have a risk committee before the Dodd-Frank Act forced bank holding companies with assets in excess of $10 billion to have a board risk committee, and (2) establishing a board risk committee does not reduce a bank’s risk on average. Using unique interview data, we show that the work of risk committees is consistent with our theory in part.
We thank Christiana Antwi-Obimpeh, Dana Hermanson, and participants in a lunch presentation at Ohio State for comments. This project would not have been possible without the willingness of 20 risk committee chairs to be interviewed and we thank them. We also appreciate Lele Chen, Viet Pham, Meng Guo, and Leandro Sanz for scientific assistance. This project was funded in part by The University of Texas at San Antonio, Office of the Vice President for Research. Zhongxia (Shelly) Ye also acknowledges great support from the College of Business Summer grant program. Rohan Williamson is chair of the board of a bank. René Stulz consults for financial institutions. James Tompkins has provided corporate governance consulting and expert witness services in the banking industry. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.