Bank Boards : Navigating Risk and Regulatory Alignment

Using bank board-level data and unique director work experience records from a large sample of publicly-listed U.S. banks, we examine (i) whether cognitively concentrated or diverse board align banks’ risk-taking preferences with those of regulators in terms of capital adequacy, and (ii) the drivers of heterogeneity among boardroom experts. Cognitively diverse boards increase risk-taking and reduce regulatory capital, while concentrated boards show the opposite. This effect is more pronounced during financial crises and for TARP recipient banks, suggesting that board sector diversity is crucial for aligning bank’s risk-taking preferences with regulatory compliance