The Influence of Risk Governance on Risk Outcomes - International Evidence
Macquarie Applied Finance Centre Research Paper No. 37, November 2012
53 Pages Posted: 10 Dec 2012 Last revised: 29 Mar 2013
Date Written: November 1, 2012
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: Suggested Citation