Logo image
Back
Causal Impact of Risk Oversight Functions on Bank Risk: Evidence from a Natural Experiment
Working paper   Open access

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

Lakshmi Balasubramanyan, Naveen D Daniel, Joseph G. Haubrich and Lalitha Naveen
Working Papers of the Federal Reserve Bank of Cleveland, WP 19-01
10 Jan 2019
DOI: https://doi.org/10.26509/frbc-wp-201901
url
http://doi.org/10.26509/frbc-wp-201901View
Published, Version of Record (VoR)Open Access (License Unspecified),  Open
url
https://doi.org/10.26509/frbc-wp-201901View
Published, Version of Record (VoR) Open

Abstract

bank holding companies risk chief risk officer risk committee Dodd Frank Act bank risk
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.

Metrics

10 Record Views

Details

Logo image