Determinants and Consequences of Risk Management Committee Formation
This paper examines the determinants and consequences of financial institutions voluntarily forming risk management committees (RMCs). Specifically, I determine whether RMCs are related to a change in risk outcomes, an increase in profitability, a change in hedging and trading derivative structures, and greater financial reporting quality during the post-committee formation period compared to a control group. I use a sample of financial institutions that form a RMC in any year from 1994 through 2008 and a control sample of financial institutions that do not form a RMC during the sample period. The results provide evidence to suggest that financial institutions with a higher level of risk, a Chief Risk Officer (CRO), lower financial reporting quality, a larger board, a board that has a greater proportion of independent members, international banking activity, merger and acquisition activity, a CEO as Chairman of the Board, and a Big N auditor, are more likely to form a RMC. There is some evidence to suggest that RMC formation is negatively associated with a change in risk only for financial institutions with a high-level of risk in the year prior to RMC formation. RMCs and CROs act as substitutes (not complements) when it comes to reducing non-performing assets and loan charge-offs in high risk firms. Additionally, the results provide some evidence to suggest that RMC formation is associated with an increase in the notional values of both hedging and trading derivatives. Interestingly, for firms with a high notional value of trading derivatives, a CRO serves as a mitigating force to reduce the notional value of trading derivatives. Moreover, for firms with a low level of profitability, RMC formation is not associated with a change in profitability. However, the presence of a CRO is related to an increase in profitability. The presence of both a RMC formation and a CRO is associated with a decrease in profitability. Therefore, RMCs and CROs do not act as substitutes r complements when it comes to increasing profitability in firms with a low level of profitability.
Social sciences, Committees, Financial institutions, Profitability, Risk management, Accounting, Business Administration, Management, and Operations, Finance and Financial Management
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