DOES RISK COMMITTEE MATTER? EVIDENCE FROM THE US FINANCIAL INSTITUTIONS

Abstract

In July 2010, the US government passed the Dodd-Frank Act which requires US banks with $10 billion or more in total assets to establish a standalone risk committee on board level. The Federal Reserve further requires these banks to appoint a CRO. This paper aims to analyze the potential usefulness of risk committee and CRO in light of these new requirements. Using hand collected data from 310 US banks from 2007-2011, we find evidence that the presence of a standalone risk committee is associated with lower risk taking activities in banks. Furthermore, we find evidence that specific risk committee and corporate governance characteristics are associated with lower risk taking. However, our findings suggest that the presence of a CRO does not reduce risk taking. Moreover, our findings highlight a potential shortcoming of the Act since we find that risk committee is only associated with lower risk taking for banks with less than $10 billion in total assets.