Risk management committee and bank performance: Evidence from the adoption of the Dodd–Frank Act

Abstract

AbstractWe test the effect of the establishment of a risk management committee on bank risk, bank loan performance and bank profitability. The Dodd–Frank Act of 2010 provides us with quasi‐experimental variation on risk management committee establishment that facilitates identification. We identify the risk management committee effect using an instrumental variable model based on the difference‐in‐differences design. We find that the establishment of a risk committee has effectively reduced bank risks. In addition, risk committee member independence, more risk committee meetings and more risk committee members are all instrumental to bank risk reduction. We also find evidence that the risk reduction effect from the risk management committee is more pronounced among asset‐diversified banks. Finally, the establishment of a risk committee helps with loan quality improvement and firm profitability increment, which sheds light on the bright side of stringent bank regulation.