Proactive risk-taking and loan performance : evidence from bank holding companies

This chapter applies the resource-based view (RBV) and competency theory to investigate how effectiveness of risk management affects risk-taking and loan performance in bank holding companies (BHCs). It argues that effective risk management is a unique resource and offers firms comparative advantages in risk-taking. Using a comprehensive risk-management index (RMI) as a proxy for effective risk management in the context of BHCs, the authors find that high-RMI BHCs are more proactive in their risk-taking, more likely to lend to risky borrowers, and charge higher rates and fees. High-RMI banks are also diligent monitors, designing stringent contracts, forming concentrated syndicates, and experiencing fewer covenant violations and downgrades.