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

70 Pages Posted: 10 Feb 2010 Last revised: 12 May 2014

Andrew Ellul

Indiana University - Kelley School of Business - Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); University of Naples Federico II - CSEF - Center for Studies in Economics and Finance

Vijay Yerramilli

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

Multiple version iconThere are 2 versions of this paper

Date Written: August 31, 2012

Abstract

We construct a Risk Management Index (RMI) to measure the strength and independence of the risk management function at bank holding companies (BHCs). U.S. BHCs with higher RMI before the onset of the financial crisis have lower tail risk, lower non-performing loans, and better operating and stock return performance during the financial crisis years. Over the period 1995 to 2010, BHCs with a higher lagged RMI have lower tail risk and higher return on assets, all else equal. Overall, these results suggest that a strong and independent risk management function can curtail tail risk exposures at banks.

Keywords: Risk Management, Tail Risk, Banks, Financial Crisis

JEL Classification: G21, G32

Suggested Citation

Ellul, Andrew and Yerramilli, Vijay, Stronger Risk Controls, Lower Risk: Evidence from U.S. Bank Holding Companies (August 31, 2012). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1550361 or http://dx.doi.org/10.2139/ssrn.1550361

Andrew Ellul

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

University of Naples Federico II - CSEF - Center for Studies in Economics and Finance ( email )

Via Cintia
Complesso Monte S. Angelo
Naples, Naples 80126
Italy

Vijay Yerramilli (Contact Author)

University of Houston, C. T. Bauer College of Business ( email )

Houston, TX 77204
United States
713-743-2516 (Phone)

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