Abstract While the Dodd–Frank Act (DFA) mandates board risk committees for large banks, we argue that such committees do not benefit all banks. Banks forced by the DFA to adopt a board risk committee do not experience a reduction in risk following adoption. In contrast, banks that voluntarily established risk committees before the DFA exhibit lower risk, especially when these committees possess greater risk expertise. Using unique interview data, we find that board risk committees serve as active monitors rather than merely rubber-stamping management proposals. However, regulatory-mandated tasks limit their monitoring role.

Abstract Financial expertise among independent directors of U.S. banks is positively associated with balance-sheet and market-based measures of risk in the run-up to the 2007–2008 financial crisis. While financial expertise is weakly associated with better performance before the crisis, it is strongly related to lower performance during the crisis. Overall, the results are consistent with independent directors with financial expertise supporting increased risk taking prior to the crisis. Despite being consistent with shareholder value maximization ex ante, these actions become detrimental during the crisis. These results are not driven by powerful chief executive officers who select independent financial experts to rubber stamp strategies that satisfy their risk appetite.

In most countries, many of the largest corporations are controlled by large shareholders.We show that, under reasonable assumptions, this stylized fact implies that portfolio holdings of U.S. investors should exhibit a home bias in equilibrium.We construct an estimate of the world portfolio of shares available to investors who are not controlling shareholders.This available world portfolio differs sharply from the world market portfolio.In regressions explaining the portfolio weights of U.S. investors, the world portfolio of available shares has a positive significant coefficient but the world market portfolio has no additional explanatory power.This result holds when we control for country characteristics.