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

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 Codes: G21, G34, G38.

Suggested citation: Balasubramanyan, Lakshmi, Naveen D. Daniel, Joseph G. Haubrich, and Lalitha Naveen. 2019. “Causal Impact of Risk Oversight Functions on Bank Risk: Evidence from a Natural Experiment.” Federal Reserve Bank of Cleveland, Working Paper no. 19-01.

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