Stronger Risk Controls, Lower Risk: Evidence from U.S. Bank Holding Companies




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    • Andrew Ellul is at the Kelley School of Business, Indiana University, and Vijay Yerramilli is at the C. T. Bauer College of Business, University of Houston. We thank an anonymous referee, the Associate Editor, Cam Harvey (Editor), Rajesh Aggarwal, Utpal Bhattacharya, Charles Calomiris (discussant), Mark Carey, Sudheer Chava, Michel Crouhy (discussant), Mark Flannery, Reint Gropp (discussant), Laurent Fresard, Radhakrishnan Gopalan, Nandini Gupta, Iftekhar Hassan, Jean Helwege, Christopher Hennessy, Tullio Jappelli, Steven Kaplan, Anil Kashyap, Bill Keeton (discussant), Jose Liberti, Marco Pagano, Rich Rosen, Philipp Schnabl (discussant), Amit Seru, Phil Strahan, René Stulz, Anjan Thakor, Krishnamurthy Subramanian, David Thesmar, Greg Udell, James Vickery, Vikrant Vig, Jide Wintoki, and seminar participants at the American Finance Association meetings (Denver), CAREFIN-University of Bocconi Conference on Matching Stability and Performance, CEPR Summer Symposium in Gerzensee, European Finance Association meetings (Frankfurt), European School of Management and Technology (Berlin), Federal Reserve Bank of Chicago Conference on Bank Structure and Competition, Federal Reserve Bank of New York–Columbia University Conference on Governance and Risk Management in the Financial Services Industry, Indiana University, London Business School, London School of Economics, LSE/Bank of England “Complements to Basel” Conference, NBER Sloan Project Conference on Market Institutions and Financial Market Risk, Rice University, Southwind Finance Conference at the University of Kansas, and University of Naples Federico II for their helpful comments and suggestions. We also thank our research assistants, Robert Gradeless and Shyam Venkatesan, for their diligent effort. All remaining errors are our responsibility.


We construct a risk management index (RMI) to measure the strength and independence of the risk management function at bank holding companies (BHCs). The U.S. BHCs with higher RMI before the onset of the financial crisis have lower tail risk, lower nonperforming loans, and better operating and stock return performance during the financial crisis years. Over the period 1995 to 2010, BHCs with a higher lagged RMI have lower tail risk and higher return on assets, all else equal. Overall, these results suggest that a strong and independent risk management function can curtail tail risk exposures at banks.