Bank-Owned Life Insurance and Bank Risk

Abstract

The use of bank-owned life insurance (BOLI) has more than tripled since 2001 and has caught the attention of the Office of the Comptroller of the Currency. We find increases in BOLI lead to higher levels of liquidity risk, credit risk, and interest rate risk. Robustness tests confirm these results and suggest over and under investment in BOLI and use of BOLI as a tax shelter contribute to risk increases. Results indicate that the concerns expressed by regulators are warranted, and suggest insurance may not always have the intended effect of reducing firm risk because of unintended consequences or misuse.

Keywords: Bank-owned life insurance, corporate owned life insurance, key employee insurance, bank risk

JEL Classification: G21, G22, G28