The impact of risk committee on financial performance of UK financial institutions

Abstract

Following the recent financial crisis, Walker (2009) recommended that financial institutions should form a separate board level risk committee (RC) to manage various risks and prevent excessive risk taking. This research focuses on investigating how firms with separate risk committees differ from those that do not have one. The main research question we address is whether RCs have a fundamental influence on financial performance. We measure financial performance by ROA and ROE and we control for firm size, liquidity and gearing. Our sample consists of all listed financial institutions in FTSE-100 index from 2010 through 2014. Results indicate a negative relationship between risk committee characteristics (i.e., existence, size, independence, and meeting frequency) and financial performance. The results also indicate that firms without RC performed considerably well than firms with RC. The results are contradictory to Walker's (2009) where RCs are recommended for their ability to mitigate and manage risks more expertly. However, we argue that establishing strong RC constrains management ability to make excessive risk taking behaviour, which may affect financial performance negatively. We contribute to the current research on the impact of risk committee governance attributes on financial performance after banking and governance reforms.