Found 3 article(s) for author 'derivatives'

The Hazards of Expert Control: Chief Risk Officers and Risky Derivatives

The Hazards of Expert Control: Chief Risk Officers and Risky Derivatives. Frank Dobbin, May 31, 2017, Paper, “At the turn of the century, regulators introduced policies to control bank risk-taking. Many banks appointed chief risk officers (CROs), yet bank holdings of new, complex, and untested financial derivatives subsequently soared. Why did banks expand use of new derivatives? We suggest that CROs encouraged the rise of new derivatives in two ways. First, we build on institutional arguments about the expert construction of compliance, suggesting that risk experts arrived with an agenda of maximizing risk-adjusted returns, which led them to favor the derivatives. Second, we build on moral licensing arguments to suggest that bank appointment of CROs induced “organizational licensing,” leading trading-desk managers to reduce policing of their own risky behavior.Link

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The Rise of Risky Derivatives: Chief Risk Officers, CEOs, and Fund Managers

The Rise of Risky Derivatives: Chief Risk Officers, CEOs, and Fund Managers. Frank Dobbin, November 18, 2016, Paper, “At turn of the century, regulators introduced policies to control bank risk-taking. Many banks appointed chief risk officers (CROs), yet bank holdings of new, complex and untested financial derivatives subsequently soared. Institutionalists suggest that firms respond to regulations by appointing compliance experts, who sometimes exaggerate legal requirements. We propose a more nuanced institutional theory of expert interests, and highlight effects of other powerful groups. Rather than overstating what the law required, risk experts sought to cement their role in shareholder-value management with compliance strategies that they also marketed as maximizing risk-adjusted returns.Link

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The Chief Risk Officer as Trojan Horse: How Sarbanes-Oxley Promoted the Abuse of Risky Derivatives

The Chief Risk Officer as Trojan Horse: How Sarbanes-Oxley Promoted the Abuse of Risky Derivatives. Frank Dobbin, 2016, Paper. “In the wake of the Enron, Worldcom, and Tyco scandals, Congress passed the Sarbanes-Oxley Act of 2002 to restrain corporate risk, malfeasance, and fraud. Many commercial banks responded by appointing chief risk officers to manage compliance. But risk managers entered their new positions with a professional agenda to maximize riskadjusted returns. The agenda, we predict, led chief risk officers to promote reliance on riskier derivatives. We also predict that others with the power to direct firm strategy responded by championing or restraining risk-taking, depending on their interests. Fund managers and CEOs with large, illiquid stakes in a bank restrained the chief risk officer, while CEOs dependent on bonuses endorsed riskier strategies. We test these ideas with data on 157 large commercial banks between 1995 and 2010. We contribute to institutional theory’s understanding of the professions in two ways …” Link

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