70 Pages Posted: 10 Feb 2010 Last revised: 12 May 2014
Date Written: August 31, 2012
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: 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
By Klaus Hopt