The Influence of Risk Governance on Risk Outcomes - International Evidence

Macquarie Applied Finance Centre Research Paper No. 37, November 2012

Systemic Risk: Liquidity Risk, Governance and Financial Stability

53 Pages Posted: 10 Dec 2012 Last revised: 29 Mar 2013

See all articles by Anna Lingel

Anna Lingel

Technical University Munich

Elizabeth A. Sheedy

Macquarie University Department of Applied Finance; Financial Research Network (FIRN); Macquarie University, Macquarie Business School

Date Written: November 1, 2012

Abstract

In this paper we investigate risk governance in 60 major international financial institutions and its influence on risk (calculated from equity returns). Risk governance has increased significantly during our sample period. We find the following variables to be important in determining risk outcomes in subsequent periods: inclusion of the CRO in the senior executive team, CRO ranked in the Top 5 paid executives, the activity of the Risk Committee and the proportion of experienced bankers in the Risk Committee. A Risk Governance Index (RGI) is derived from the first three principal components of these four variables. A panel regression spanning from 2004-2010 supports the hypothesis that stronger governance leads to lower risk. The results are robust to endogeneity when we estimate System GMM regressions. Stronger risk governance does not, however, have a significant impact on risk outcomes at the height of the financial crisis (2007-08).

Keywords: governance, financial institutions, risk, CRO

JEL Classification: G01, G21, G32

Suggested Citation

Lingel, Anna and Sheedy, Elizabeth A., The Influence of Risk Governance on Risk Outcomes - International Evidence (November 1, 2012). Macquarie Applied Finance Centre Research Paper No. 37, November 2012; Systemic Risk: Liquidity Risk, Governance and Financial Stability. Available at SSRN: https://ssrn.com/abstract=2187116 or http://dx.doi.org/10.2139/ssrn.2187116

Anna Lingel

Technical University Munich ( email )

Arcisstrasse 21
Munich, 80333
Germany

Elizabeth A. Sheedy (Contact Author)

Macquarie University Department of Applied Finance ( email )

Room 739, 4 Eastern Road
Macquarie University
North Ryde, NSW 2109
Australia
61-2-9850 7755 (Phone)
61-2-9850 7281 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

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