Risk Management Committee and Bank Performance: Evidence from the Adoption of Dodd-Frank Act

Abstract

This paper tests the effect of the establishment of risk management committee on bank risk, bank loan performance and bank value. The Dodd Frank Act of 2010 provides us with quasi-experimental variation on risk management committee establishment that facilitates identification. I present two identification methods: (1) identifying the risk management committee effect using an instrumental variable that is based on the difference-in-differences; and (2) testing the risk management committee effect using the $10 billion assets as a cutoff and employing the fuzzy regression discontinuity design. I find that the establishment of risk committee has effectively reduced bank risks, including total risk, tail risk, residual risk, and asset risk. The risk committee is also beneficial to firm value increment and non-performing loan reduction. In addition, I find that the risk reduction effect from the risk management committee is more pronounced among asset diversified banks.