Causal Impact of Risk Oversight Functions on Bank Risk: Evidence from a Natural Experiment

49 Pages Posted: 25 Jan 2019

See all articles by Lakshmi Balasubramanyan

Lakshmi Balasubramanyan

Case Western Reserve University - Weatherhead School of Management

Naveen D. Daniel

Drexel University - Department of Finance

Joseph G. Haubrich

Federal Reserve Bank of Cleveland

Lalitha Naveen

Temple University - Department of Finance

Date Written: January 10, 2019

Abstract

Our goal is to document the causal impact of having a board-level risk committee (RC) and a management-level executive designated as chief risk officer (CRO) on bank risk. The Dodd Frank Act requires bank holding companies with over $10 billion of assets to have an RC, while those with over $50 billion of assets are additionally required to have a CRO to oversee risk management. The innovation that allows us to document a causal impact is our research design. First, we use the passage of the Dodd Frank Act as a natural experiment that forced noncompliant firms to adopt an RC and appoint a CRO. We adopt the difference-in-difference approach to estimate the change in risk following RC and CRO adoption. Second, we use the regression discontinuity approach centered on the $10 billion and $50 billion thresholds whereby firms that were just below the threshold were not required by the law to install an RC and to recruit a CRO, while those just above the thresholds had to comply with the regulation. Our contribution is to document that neither the RC nor the CRO have a causal impact on risk near these thresholds. However, we do find strong evidence of risk reduction following the passage of the law.

Keywords: Bank Holding Companies, Risk, Chief Risk Officer, Risk Committee, Dodd Frank Act, Bank Risk

JEL Classification: G21, G34, G38

Suggested Citation

Balasubramanyan, Lakshmi and Daniel, Naveen D. and Haubrich, Joseph G. and Naveen, Lalitha, Causal Impact of Risk Oversight Functions on Bank Risk: Evidence from a Natural Experiment (January 10, 2019). FRB of Cleveland Working Paper No. 19-01. Available at SSRN: https://ssrn.com/abstract=3320766 or http://dx.doi.org/10.2139/ssrn.3320766

Lakshmi Balasubramanyan

Case Western Reserve University - Weatherhead School of Management ( email )

10900 Euclid Ave.
Cleveland, OH 44106-7235
United States

Naveen D. Daniel

Drexel University - Department of Finance ( email )

LeBow College of Business
Philadelphia, PA 19104
United States
215-895-5858 (Phone)
215-895-2955 (Fax)

HOME PAGE: http://lebow.drexel.edu/Faculty/DanielN

Joseph G. Haubrich (Contact Author)

Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States
216-579-2802 (Phone)
216-579-3050 (Fax)

Lalitha Naveen

Temple University - Department of Finance ( email )

Fox School of Business and Management
Philadelphia, PA 19122
United States
215-204-6435 (Phone)

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