Board financial expertise and the capital decisions of US banks

Abstract

We examine whether increasing financial expertise among independent directors facilitates bank capital decisions that promote financial stability. We find US banks with more financial expert independent directors opt for higher target capital ratios and adjust faster their capital structure when they are below the target. We provide evidence suggesting that our results are driven by the skill-set of these directors that lead to a better understanding of bank risks and access to external recapitalization choices. Our findings are further amplified by an increase in the exposure to losses of financial expert directors and by exogenous increases in regulatory scrutiny.