Estimating the Potential Impact of Requiring a Stand-Alone Board-Level Risk Committee

Abstract

This paper investigates the effects of the requirement under the Dodd-Frank Act that all large bank holding companies create a stand-alone, board-level risk committee. In addressing this issue I focus on banks that had not voluntarily created such a committee prior to the legislation, as these are the banks that are most affected by the new rule. I find that requiring large banks to maintain a risk committee is associated with increased capital ratios during the global financial crisis, but with decreased capital ratios during more stable economic conditions. The time varying nature of the results highlights the importance of estimating the effect of proposed policy changes over multiple states of the economy. This paper contributes to the literature by investigating the effects of a relatively understudied aspect of board structure, the presence of a risk committee, and by providing an identification strategy that can be used to investigate standard setting and regulatory changes before the changes are put in place.