We investigate the relationship between boardroom gender diversity and firm risk. To identify a causal effect of gender on risk, we use a dynamic model that controls for reverse causality and for gender and risk being influenced by unobservable firm factors. We find no evidence that female boardroom representation influences equity risk. We also show that findings of a negative relationship between the two variables are spurious and driven by unobserved between-firm heterogeneous factors.

Manuscript Type: ReviewResearch Question/Issue: Bank governance has become the focus of a flurry of recent research and heated policy debates. However, the literature presents seemingly conflicting evidence on the implications of governance for bank risk-taking. The purpose of this paper is to review prior work and propose directions for future research on the role of governance on bank stability. Research Findings/Insights:We highlight a number of key governance devices and how these shape bank risk-taking: the effectiveness of bank boards, the structure of CEO compensation, and the risk management systems and practices employed by banks.Theoretical/Academic Implications: Prior work primarily views bank governance as a mechanism to protect the interests of bank shareholders only. However, given that taxpayerfunded guarantees protect a substantial share of banks' liabilities and that banks are highlyleveraged, shareholder-focused governance may well subordinate the interests of other stakeholders and exacerbate risk-taking concerns in the banking industry. Our review highlights the need for internal governance mechanisms to mitigate such behavior by reflecting the needs of shareholders, creditors and the taxpayer.Practitioner/Policy Implications: Our review argues that the relationship between governance and risk is central from a financial stability perspective. Future research on issues highlighted in the review offer a footing for reforming bank governance to constrain potentially undesirable risk-taking by banks.

We analyze how the structure of executive compensation affects the risk choices made by bank CEOs. For a sample of acquiring U.S. banks, we employ the Merton distance to default model to show that CEOs with higher pay-risk sensitivity engage in risk-inducing mergers. Our findings are driven by two types of acquisitions: acquisitions completed during the last decade (after bank deregulation had expanded banks' risk-taking opportunities) and acquisitions completed by the largest banks in our sample (where shareholders benefit from 'too big to fail' support by regulators and gain most from shifting risk to other stakeholders). Our results control for CEO pay-performance sensitivity and offer evidence consistent with a causal link between financial stability and the risk-taking incentives embedded in the executive compensation contracts at banks.

Using an international sample of large banks between 2000 and 2010, we evaluate the risk sensitivity of minimum capital requirements. Our results show that risk-weighted assets (the regulatory measure of portfolio risk which determines minimum capital requirements) are illcalibrated to a market measure of bank portfolio risk. We show that this low-risk sensitivity of capital requirements permits banks to build up capital buffers by underreporting their portfolio risk and undermines banks' ability to withstand adverse shocks. While the risk sensitivity of capital requirements is higher for banks that have adopted Basel II, it remains low across banks and countries.