Bank Boards: What Has Changed Since the Financial Crisis?

Abstract

Abstract: We investigate how board oversight of U.S. banks has changed since the 2008 financial crisis. We review several expert reports that investigated the crisis to identify key board oversight deficiencies and group them into four categories: (i) lack of enterprise risk management, (ii) lack of risk awareness on the board, (iii) group think among bank directors and (iv) busy directors, especially the chairperson. Our empirical analysis examines improvements, if any, in each of these categories for 95 U.S. banks post-crisis (2008-2015), relative to the pre-crisis period (2000-2007). We find significant structural improvements to the banks’ enterprise risk management structure. Virtually every bank now has a Chief Risk Officer (CRO), and the number of banks with an independent risk committee and a committee devoted to reputation management has also increased significantly. With respect to risk awareness, we find that newly appointed bank directors are much more likely to have prior risk management, banking and specialty finance experience. There are also significantly more risk-related discussions within the financial statements, which indicate a heightened level of risk awareness. With respect to group think and busy board members, we find mixed evidence of progress. We document greater gender diversity and more empowered corporate governance and nominating committee after the crisis. In sum, at least some aspects of bank boards appear to have responded to the financial crisis.