Abstract

http://ssrn.com/abstract=1636647
 
 

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


Andrew Ellul


Indiana University Bloomington - Department of Finance

Vijay Yerramilli


University of Houston, C. T. Bauer College of Business

July 2010

NBER Working Paper No. w16178

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.

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Date posted: July 12, 2010  

Suggested Citation

Ellul, Andrew and Yerramilli, Vijay, Stronger Risk Controls, Lower Risk: Evidence from U.S. Bank Holding Companies (July 2010). NBER Working Paper No. w16178. Available at SSRN: http://ssrn.com/abstract=1636647

Contact Information

Andrew Ellul (Contact Author)
Indiana University Bloomington - Department of Finance ( email )
1309 E. 10th St.
Bloomington, IN 47405
United States
Vijay Yerramilli
University of Houston, C. T. Bauer College of Business ( email )
Houston, TX 77204
United States
713-743-2516 (Phone)
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