Internal Control Quality and Bank Performance During the Financial Crisis
45 Pages Posted: 3 Jan 2019
Date Written: December 17, 2018
It is unclear whether strong internal controls at banks lead to more efficient risk-taking or to absolute reductions in risk-taking, which reduces the likelihood of bad and good outcomes. We find that banks that disclosed a material weakness in internal controls prior to the crisis are more (less) likely to have experienced extreme negative (positive) performance during the crisis, suggesting internal controls improve efficient risk-taking. We also find that these banks increased lending in the crisis, contributing to the origination of bad loans. Overall, results suggest that internal controls do not just reduce risk-taking but also improve performance, on average.
Keywords: financial crisis, bank performance, lending, internal control quality
JEL Classification: E50, G01, G21, M41, M48
Suggested Citation: Suggested Citation