Financial Institution Risk Management
Friday, Jan. 6, 2017 10:15 AM – 12:15 PM
Sheraton Grand Chicago, Chicago Ballroom IX
- Chair: Michael Faulkender, University of Maryland
Risk Management in Financial Institutions
AbstractWe study risk management in financial institutions using data on hedging of interest rate risk by U.S. banks and bank holding companies. Theory predicts that more financially constrained institutions hedge less and that institutions whose net worth declines due to adverse shocks reduce hedging. We find strong evidence consistent with the theory both in the cross-section and within institutions over time. For identification, we exploit net worth shocks resulting from loan losses due to drops in house prices. Institutions which sustain such losses reduce hedging substantially relative to otherwise similar institutions. We find no evidence that risk shifting, changes in interest rate risk exposures, or regulatory capital explain hedging behavior.
Do Bank Boards Focus Adequately On Risk?
AbstractPrior academic research on bank governance has concentrated on the role of board
structure. However, board conduct and its relationship to bank governance has not
received attention. In this paper, we fill this gap by analyzing the minutes of board
and risk management committee meetings of 29 banks in India. We manually classify
the issues into different categories, and code whether each issue has been deliberated
at length. Risk accounts for only 10% of the board's attention with regulation and
compliance accounting for the most (41%) followed by business strategy (31%). Only
20% of the issues are deliberated at length. The risk management committee meets
infrequently and deliberates only 28% of the issues. Only 25% of the issues tabled in the
risk management committee are forward-looking in nature. Using a simple framework
to discipline our analysis and to enable the interpretation of our results, we infer that
bank boards are under-investing in matters relating to risk and over-investing in matters
pertaining to compliance.
University of Virginia
U.S. Securities and Exchange Commission
Michigan State University
- G3 - Corporate Finance and Governance